Investment Highlights

• We maintain HOLD on Sunway Construction (SunCon) with an unchanged fair value (FV) of RM1.69/share, based on a FY23F PE of 14x, in line with our benchmark for large cap construction stocks. Our FV also includes a 3% premium to reflect our 4-star ESG rating.

• We met up with SunCon for updates recently. Here are the key takeaways:
  • YTD order book wins amount to RM881mil. Despite achieving only 44% of their targeted FY23F job wins of RM2.0bil, we maintain our more conservative order book replenishment assumption of RM1.7bil for now.
  • With a tender book of RM17bil, potential replenishment jobs may come from the construction of data centres and semiconductor manufacturing plants, internal building jobs from related companies of Sunway Group and the above-ground portion of the Mass Rapid Transit (MRT) 3.
  • SunCon has seen slowdowns in contractors being called to tender for private non-residential projects in recent weeks. We think project owners are holding back, pending post-general election stability.
  • SunCon expects steel prices to stabilise in FY23F. In Jun/Jul 2022, SunCon managed to lock-in prices for steel that are needed until Dec 2022.
  • Recall that SunCon obtained approval for 400 Indonesian workers earlier this year. Out of these, 300 have arrived while the remaining 100 will arrive by the end of the year. Including the existing 100 foreign workers, SunCon’s migrant workforce will amount to 500 in total. In comparison, SunCon had a peak of 800 foreign workers during the construction of MRT2 and LRT3.
• Currently, we estimate SunCon’s outstanding order book to be RM4.1bil, which translates to 1.5x of FY23F revenue. However, we think that SunCon is positioned to secure MRT3 jobs given its strong balance sheet and proven track records in MRT1 and MRT2. We believe the main contractor packages will be awarded in 4Q2022/1Q2023, with subcontracting jobs to be given out in 1Q2023.

• We anticipate SunCon’s operating margins to be stable at 7% in both FY23F and FY24F as most building material costs have reached their peak in 2QFY22.

• Risks to SunCon include: (i) eroding operating margins from rising building material costs and labour shortages; and (ii) delays/cost revisions of mega projects.

• We view the stock as fairly valued with a limited upside of 10%, trading at FY23F PE of 13x – near current valuations of 14x for large cap construction companies.

Source: AmInvest Research - 14 Nov 2022