Highlights

• Meet up with parent-co. Yesterday, we met up with the management of Sunway (BUY, TP: RM3.63) which was represented by its CFO, Mr Chong Chang Choong. Sunway is the parent-co of SunCon with a 54% stake.

• MRT2 takes off. MRT Corp yesterday announced that it has awarded Package V201 of the Sg Buloh-Serdang-Putrajaya line (MRT2) worth RM1.21bn to SunCon. The said package spans 4.9km from Sg Buloh to Persiaran Dagang which is scheduled for completion in 2Q21.

• Better margins likely. SunCon’s bid is said to be the lowes t amongst the 4 bidders for Package V201. Despite that, we reckon that margins for this MRT2 job are likely to be higher than that for MRT1. Having garnered experience from MRT1, management guides that it is now in a better position to price for contingencies in its bid. From our calculations, the average price per km for Package V201 stands at RM247m, 34% higher than that for Package V4 (MRT1) which was also undertaken by SunCon.

• Boasting a record orderbook… SunCon has managed to amass RM1.4bn worth of new jobs YTD (RM1.2bn from MRT2 and RM170m from its parent-co and precast). We estimate its orderbook to currently stand at a record RM5bn, translating to a healthy cover ratio of 2.6x on FY15 revenue.

• …and gunning for more. Management is upbeat that it can secure RM2.5bn worth of new contracts this year (55% achieved YTD). It has tendered for the Pan Borneo Highway which should rake in at least another RM300m based on a 30% stake at a conservative RM1bn contract sum. Apart from that, has been prequalified for the SUKE (RM4bn) and DASH (RM4bn) and is undergoing prequalification for the LRT3 (RM9bn). There are also several private sector jobs such as (i) Ikea Mall in Tebrau (RM300m) where SunCon is one of the three prequalified names and (ii) an aero maintenance facility (>RM100m) near Subang Airport and (ii) contracts from its parent-co (RM400-500m).

Risks

• Execution may be a risk given its all-time high orderbook.

Forecasts

• We raise our FY16 new job wins target from RM2bn to RM2.5bn as YTD flows have been robust. This increases our FY16-17 earnings forecast by 3-7%.

Rating

• Maintain BUY, TP raised to RM1.94
• SunCon is a well-managed company with commendable execution capability, putting it in a polar position to ride on the robust flow of mega contracts expected this year.

Valuation

• Aside our earnings upgrade, we also raise our P/E target from 16x to 18x and roll forward our valuation horizon from FY16 to mid-CY17, increasing our TP from RM1.59 to RM1.94. We reckon that the premium valuation is warranted given (i) its superior ROE of 32% which is 3-fold compared to the industry average of 11% and (ii) scarcity premium as a pure construction play.

Source: Hong Leong Investment Bank Research - 29 Mar 2016