Highlights

• An all-time high orderbook. SunCon’s orderbook stands at RM4.3bn, implying a 2.3x cover ratio on FY14 revenue. Despite this is being a decent multiple, it is still below its peers’ average of 2.7x. While YTD job wins have been strong at RM2.2bn, this merely makes up for the shortfall witnessed last year at RM763m.

• Positioned for the upcycle. Given its strong track record amongst the various government related entities (e.g. Prasarana, MRT Corp, Putrajaya Holdings and KLCC Group), we reckon that SunCon is in a polar position to ride on the impending construction upcycle under the 11MP.

• Hitting on all 3 fronts. SunCon is the only contractor that has experience with all 3 major public transport projects, namely the LRT, MRT and BRT. As such, we reckon that it is in a strong footing to participate in the upcoming work packages for the LRT3 (1Q16) and MRT Line 2 (mid-2016). Plans to implement 12 more BRT lines should augur well for SunCon as it is the only contractor that has undertaken such a project.

• Support from Sunway. SunCon is the preferred contractor for its parent-co, Sunway and has completed in excess of RM1.7bn worth of jobs for the latter. Based on the launch pipeline, management guides that it can expect RM500- 800m worth of jobs from Sunway.

• Precast potential. Singapore forms the main market for SunCon’s precast products which are primarily used in the construction of HDB flats. SunCon is expanding its precast fabrication facilities which would see its capacity increase by 47% by end-2016.

Risks

• Orderbook replenishment coming below its burn rate.

Forecasts

• We project FY15 earnings of RM115m, down 8% YoY due to: (i) the lagged impact from last year’s weak job wins; (ii) absence of JV contributions from property development and; (iii) downward normalisation of its precast margins.
• Overall, we project pedestal 3 year earnings CAGR of only 2%. Unless SunCon can replenish its orderbook significantly above its burn rate, earnings will remain flattish.

Rating

• Initiate with HOLD, RM1.25 TP (+9% upside)
• Admittedly, SunCon is a well-run company. However, the question as always, is about valuation. At FY15-16 P/E of 13x and 11.9x, we feel that SunCon is priced close to perfection for a midcap contractor. Coupled with its flattish earnings outlook, this prompts us to initiate coverage with a HOLD rating.

Valuation

• Our TP of RM1.25 is based on 13x FY16 earnings, inline with its mid-cap peer WCT.
• Dividend yield is decent at 2.7% and 2.9% for FY15-16 based on a minimum payout ratio of 35%.

Source: Hong Leong Investment Bank Research - 2 Oct 2015