Investment Highlights

• We upgrade Sunway Construction (SunCon) to BUY with a higher fair value (FV) of RM1.84/share (vs. RM1.51/share previously). Our FV is based on 14x FY23F PE, in line with our benchmark PE for large-cap construction stocks. We also ascribe a 3% premium to reflect our 4-star ESG rating.

• SunCon has secured a substantive contract worth RM1.7bil to design, develop and construct a data centre in Sedenak Tech Park in Johor for Yellowwood Properties. The contract is expected to be completed in 3QFY24.

• Excluding this award, total projects secured by SunCon in FY22 amounted to RM0.9bil, lower than our replenishment assumption of RM1.2bil for the year. With this new contract, we are now assuming an order book replenishment assumption of RM2.9bil for FY23F vs. RM2.0bil previously.

• Based on SunCon’s estimated share of PBT from the contract at RM64mil in FY23F, or 39% of FY23F net profit, we raise SunCon’s net profit by 22% for FY23F and 15% for FY24F to account for the higher order book replenishment assumption.

• Potential replenishments may come from the construction of semi-conductor plants and internal building jobs from companies within the Sunway group. We also believe that SunCon is well positioned to secure MRT3 jobs due to its strong balance sheet and proven track records in MRT1 and MRT2.

• We may also raise our earnings estimates further if the huge engineering, procurement and construction (EPC) contract worth RM10bil with Toyo Ink Group (Toyo) and Song Hau 2 Power Company (Song Hau 2) is executed in FY23F.

• As a recap, SunCon, via Sunway-PECC2 Consortium has entered into an interim EPC agreement with Toyo and Song Hau 2. The agreement serves as a framework for negotiations and discussions between the parties to establish SunCon’s performance of works for the development of 2 units of 1,060 MW coal-fired thermal power plant project in Vietnam.

• Risks 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 attractive given its 18% upside to our revised fair value. Also, SunCon is currently trading at an undemanding FY23F PE of 12x, which is 13% below our benchmark of 14x for large-cap construction companies.

Source: AmInvest Research - 3 Jan 2023