News

• Wins LRT3 contract. SunCon was awarded a RM2.2bn contract (excluding GST) from Prasarana for Package GS07-08 of the LRT3. The contract entails 9.2km of viaduct works, 6 stations, 1 iconic bridge over the Klang River, 2 park & ride facilities and a centralised labour quarter at Johan Setia. The contract duration is for 36 months.

Comments

• Positive surprise on size. We have always advocated SunCon as one of the top contenders for the LRT3 by virtue of its track record with the LRT ext, BRT and MRT1. However, the sheer size of this recent contract win was certainly above what we had anticipated in the tune of c.RM1bn.
• Pushing orderbook to a new high. With the LRT3 in the bag, coupled with RM582m PPA1M job secured last month, SunCon’s orderbook has increased significantly by 47% to an all-time high of RM6.3bn (compared to RM4.3bn as of 2QFY17). This implies a strong cover of 3.5x on FY16 revenue, providing strong earnings visibility over the next 3 years.
• Job wins surpass target. SunCon’s YTD job wins now total a record RM3.5bn (excluding the MRT2 stations which are already accounted for as part of the main viaduct line). This amount has surpassed management’s initial guidance of RM2bn and our assumption of RM2.5bn.

Risks

• With its all-time high orderbook, execution would be the key risk to watch out for.

Forecasts

• As YTD job wins of RM3.5bn has exceeded our full year target of RM2.5bn, we adjust our orderbook replenishment assumption to reflect this. Consequently, our FY18-19 earnings forecast are raised by 11% and 14% respectively (FY17 unchanged).

Rating

• Upgrade to BUY, TP: RM2.59
• SunCon continues to surprise us positively with its contract winning capability. We like SunCon as a well-managed contractor with strong execution ability. With stronger than expected job wins leading to a strong boost in orderbook, we upgrade our rating from Hold to BUY.

Valuation

• Following our earnings upgrade, our TP is raised from RM2.33 to RM2.59 which is still based on an unchanged 20x P/E multiple 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 - 06 Oct 2017