News

• Wins Iskandar contract from parent-co. SunCon has been awarded a RM174.5m job from its parent-co, Sunway for a development in Iskandar. The job scope involves 222 units of linked houses, cluster homes and semi-Ds which is targeted for completion by Dec 2017 (slightly more than 2 years from now).

Comments

• A good year for job wins but... With this recent job in the bag, SunCon’s YTD job wins currently stands at RM2.4bn, making up 99% of our full year orderbook replenishment target. Job wins this year are also the 2nd highest in the last 5 years (highest being in FY13 at RM3bn). We estimate its orderbook to currently stand at RM4.5bn, implying a healthy cover ratio of 2.4x on FY14 revenue.

• …merely making up for last year’s shortfall. While we acknowledge that YTD job wins have been strong, we reckon this merely makes up for last year’s shortfall (RM763m) rather than propel earnings growth.

• Well 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. Track record wise, SunCon is the only contractor that has experience with all 3 major public transport projects, namely the LRT, MRT and BRT.

Risks

• Orderbook replenishment coming below its burn rate.

Forecasts

• Our forecast is unchanged as YTD orderbook replenishment has met our full year target and we are assuming no further wins for the remainder of the year.
• Unless SunCon can garner new job wins significantly above its burn rate, earnings growth will remain pedestal (3 year CAGRf: 2%).

Rating

• TP raised slightly to RM1.35 but maintain HOLD
• Admittedly, SunCon is a well-run company. However, the question as always, is about valuation. At FY15-16 P/E of 14.1x and 13x, we feel that SunCon is priced close to perfection for a midcap contractor. Coupled with its flattish earnings outlook, it is hard to justify a Buy and hence, our HOLD recommendation.

Valuation

• With our orderbook target met for FY15, there is no longer any shortfall risk to job wins. As such, we tag a higher P/E multiple of 14x (from 13x previously) to FY16 earnings, giving rise to our new TP of RM1.35 (from RM1.25 previously).
• Our applied multiple of 14x is inline with its closet peer by market capitalisation, WCT Holdings (SELL, TP: RM1.23).

Source: Hong Leong Investment Bank Research - 16 Oct 2015