Investment Highlights

• We maintain BUY on Sunway Construction (SunCon) with a higher fair value (FV) of RM2.20/share (vs. RM2.08/share previously), based on a rolled-forward FY24F PE of 16x, which is 0.5 standard deviation above the 5-year average. Our fair value includes a 3% premium rating to reflect the group’s 4-star ESG rating.

• As YTD new job wins have exceeded our replenishment assumption of RM2.0bil, we raise our replenishment assumption for SunCon to RM2.5bil for FY23F. While we retain FY23F net profit as the new contracts will only begin contributing next year, we increase FY24F-25F earnings by 6%-14%.

• SunCon has secured 2 substantive contracts worth RM785mil (25% of FY23F revenue) as follows: 1) RM595mil contract from Daiso Malaysia Group to design and construct the Daiso Global Distribution Center Warehouse in Pulau Indah, Port Klang, Selangor via a 50:50 joint venture with Kajima (Malaysia). The warehouse is expected to be completed in 2QFY26. 2) RM190mil contract from K2 Strategic Infrastructure Malaysia for the proposed development of a data centre in Johor, scheduled to be completed in 4QFY24.

• The construction works for both contracts are expected to commence in the 1QFY24, with estimated accretion to SunCon’s net profit (NP) at RM13mil per year (or 8% of FY24F NP).

• The award of the above contracts raises new order book replenishment by 55% to RM2.2bil and outstanding order book by 12% to RM6.4bil. Hence, SunCon exceeded its own replenishment target of RM2bil in FY23F.

• Looking ahead, we believe that more contracts will be awarded before the end of FY23F. These may include Mass Rapid Transit 3, Johor Bahru–Singapore Rapid Transit System, Vietnam power plant projects, some semiconductor factories, data centres and precast projects.

• Risks are (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from rising costs, and (iii) shelving of mega projects.

• We believe that the stock is undervalued as it is currently trading at a FY24F PE of 14x, significantly below its 5-year average of 20x. SunCon also offers a decent dividend yield of 3.5% for FY24F.

Source: AmInvest Research - 6 Oct 2023