Highlights

• Back on Bursa. Sunway Construction Group (“SunCon”) is the construction arm of Sunway which in turn, was a merger between Sunway Holdings and Sun City in 2011. Essentially, SunCon was previously Sunway Holdings, minus the property and quarry divisions, making it a pure construction play upon listing.
• Not exactly at its peak… We estimate SunCon’s orderbook to stand at RM3.2bn (i.e. 1Q15: RM2.8bn + new job wins: RM470m). This implies a cover ratio of 1.7x which is below the mean of 2.7x for contractors under our coverage. Management is targeting for RM2bn in new job wins this year (24% achieved), inline with our assumption.
• …but more to add on. SunCon is the only contractor that has experience with all 3 major public transport projects, namely the LRT, MRT and BRT. This places SunCon in a sweet spot to secure packages for the upcoming MRT2 (RM28bn), LRT3 (RM9bn) and BRT. Apart from that, we understand that SunCon is in the forefront to clinch a sizable building contract (RM1.5bn) in Putrajaya. The momentum of job flows to SunCon is also supported by development projects from its parent-co, Sunway. These contracts are expected to amount to RM500-800m p.a. based on Sunway’s launch pipeline.
• Precast potential. SunCon also supplies precast concrete products in Singapore which is largely used for public housing schemes. Singapore mandates the use of modular construction on government land which should support the demand for precast concrete.

Forecasts

• We project FY15 earnings of RM116m, down 7% YoY due to the higher base in FY14 resulting from (i) property JV contributions for Sunway Alam Suria and; (ii) unusually high margins for its precast division following the finalisation of certain accounts. If the property JV contributions are removed in FY14 (non-recurring as the development is completed), FY15 earnings are projected to grow 10% YoY.
• For FY16, we forecast earnings to dip 5% before rebounding by 7% in FY17. This is primarily due to the timing gap between the securing of new contracts before any meaningful contribution kicks in.

Valuation

• Admittedly, SunCon has a strong branding with commendable execution capability, putting it in a polar position to ride on the robust contract flows under the 11MP.
• However as always, the question here is about valuation. The IPO price values SunCon at 13.4x and 14x FY15-16 P/E which is not exactly cheap vis-à-vis the average of its 3 largest peers (Gamuda, IJM and WCT) which trades at CY15-16 P/E of 14.4x and 12.8x. Our TP of RM1.25 is based on 14x FY15 earnings, implying that the IPO is priced close to perfection.
• Based on its minimum dividend payout ratio of 35%, this offers investors a yield of 2.6% for FY15 and 2.5% for FY16.

Source: Hong Leong Investment Bank Research - 2 Jul 2015