News

• Secures PPA1M contract. SunCon was awarded a RM581.7m contract from Liziz Standaco to build 6 blocks of 29-storey apartments under the PPA1M scheme (civil servant’s affordable housing) in Kota Bahru, Kelantan. The job duration is for 30 months and is expected to be completed in 1Q20.

Comments

• Job wins flowing nicely. With this recent contract secured, we estimate SunCon’s YTD job wins to stand at RM1.6bn (including RM212m stations job which is part of its main MRT2 viaduct package). Its orderbook currently stands at a near high of RM4.7bn, implying a healthy 2.6x cover on FY16 revenue.
• Top contender for LRT3. Overall, management is gunning for RM2bn in new job wins for FY17, with some sizable jobs potentially materialising for the remainder of the year. Contracts for the LRT3 (RM9bn) viaduct packages have recently started to be awarded since Aug (2 so far). We gather that SunCon is one of the top contenders to secure a package from the LRT3 given its competitive pricing and track record on such jobs such as the LRT ext, MRT1, MRT2 and BRT.

Risks

• New job wins coming in below its burn rate and orderbook timing gap between completed old jobs and commencement of newer ones.

Forecasts

• As YTD job wins of RM1.6bn is within our full year target of RM2.5bn, we maintain our earnings forecast.

Rating

Maintain HOLD, TP: RM2.33

• We acknowledge that SunCon is a well-managed contractor with commendable execution capability, putting it in a prime spot as a pure construction play. However, given its strong YTD share price performance of 35%, we feel that the stock is now priced to perfection and hence, iterate our HOLD rating. It currently trades at FY17-18 P/E of 21.1x and 19.7x respectively. We advocate its parent-co Sunway (BUY, TP: RM5.14), which trades at FY17-18 P/E of 15.5x and 14.4x, as a cheaper exposure to SunCon.

Valuation

• Our unchanged TP of RM2.33 is based on a 20x P/E target tagged to FY18 earnings.
• We reckon that our premium valuation yardstick for SunCon is justified given (i) its superior ROE of 27% which is more than double of its peer’s average and (ii) healthy balance with net cash position of RM364m (RM0.28/ share).

Source: Hong Leong Investment Bank Research - 15 Sep 2017