Investment Highlights

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

• We keep our earnings estimates following our meeting with SunCon last week. Here are the key takeaways.
  • Recall that SunCon, via Sunway-PECC2 Consortium has entered into an interim engineering procurement and construction (EPC) agreement with Toyo Ink Group (Toyo) and Song Hau 2 Power Company (Song Hau 2) in Dec 2022.
  • The agreement serves as a framework for negotiations and discussions between the parties. It will establish the detailed terms and conditions for Sunway-PECC2’s performance of the works. The EPC contract will be executed within 6 months of the date of execution of the interim EPC agreement.
  • As a recap, Song Hau 2 was incorporated in Dec 2020 in Vietnam to undertake the development of 2 units of 1,060 MW coal-fired thermal power plant project in the Song Hau Complex, Hau Giang province, Vietnam. The power plant is estimated to cost US$3.2bil (RM14bil).
  • On 29 Dec 2020, Toyo and Song Hau 2 entered into a Built-Operate-Transfer (BOT) contract with the Ministry of Industry and Trade of Vietnam (MOIT) to undertake the investment and development of the project on a BOT basis for a concession period of 25 years.
  • The EPC contract is estimated at US$2.2bil (RM10bil) and will be carried out over 57 months. We expect the project to carry a higher PBT margin of 10% compared to our earlier estimates of 8% to account for the uncertainties involved in oversea ventures.
  • SunCon believes the risk involved for the potential EPC contact to be manageable and it is currently conducting an in-depth study on the ESG risks of the project. SunCon also views this project as an opportunity to learn the technical know-how of building a power plant.
  • As Sunway-PECC2 is purely an EPC contractor, it is not required to finance the project. Based on the announcement from Toyo Ventures on 30 Dec 2022, EXIM Bank had offered to be the mandated lead arranger, bookrunner and coordinating arranger for the syndicated financing facilities of up to US$2.4bil for the construction of the power plant. We think the deal will be participated by foreign banks while Malaysian banks may not participate due to ESG concerns.
  • We believe execution risk is minimal as SunCon’s JV partner, PECC2 is a 51%-owned subsidiary of Vietnam Electricity (EVN) as well as a leading group in Vietnam’s power industry and the region. SunCon will be focusing on civil works, piling and procurement of boilers and turbine, while the design and technical aspects will be undertaken by PECC2.
  • On its construction order book, SunCon maintains a replenishment target of RM2bil for FY23F. Apart from the MRT3 and the Vietnam power plant project, potential jobs may come from the construction of warehouses and internal building jobs from companies within the Sunway group. We keep our replenishment assumption of RM2.9bil for FY23F. We may raise our earnings estimates if SunCon wins either the MRT3 or the Vietnam power plant project.
  • Testing and commissioning of plants and machineries in SunCon’s 49%-owned integrated construction and prefabrication hub (ICPH) precast plant in Singapore was completed in Dec 2022. The plant’s operation may start as soon as the trial mix testing is complete (targeted completion is Jan 2023). However, we believe the outstanding orders will be filled mainly by the group’s existing precast plants in Senai and Iskandar, Johor as the ICPH plant is still new.
  • Recall that SunCon obtained approval for 400 Indonesian workers earlier last year. Out of these, 389 have arrived and the remainder will be arriving in the coming weeks. Including these, 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.
  • To accommodate the substantive contract worth RM1.7bil secured recently to design, develop and construct a data centre in Sedenak Tech Park in Johor for Yellowwood Properties, SunCon is in the midst of applying for an additional 600 Indonesian workers.

• 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 attractive due to the 16% upside to our FV. Also, SunCon is currently trading at an undemanding 12.5x FY23F PE, 11% below our benchmark of 14x for large-cap construction companies.

Source: AmInvest Research - 9 Jan 2023