SunCon announced that PNSB Acmar has served a Writ of Summon and a Statement of Claim both dated 8 November 2019 against Prasarana and SunCon seeking damages amounting to RM712m. PNSB Acmar is alleging that construction works and structures such as poles, bars, and LRT stations in relation to the LRT3 project had trespassed and encroached into their own development project area. Based on our checks with management, SunCon maintains that the construction activities for the project has been undertaken within the confines and boundaries presented to them by the client. We keep forecasts unchanged pending 3Q19 results release on 19th Nov and further clarification from SunCon regarding the litigation. Maintain BUY rating and TP of RM2.16 based on mid- FY20 EPS pegged to an unchanged 20x PE. We like SunCon for its (i) good execution track record; (ii) strong support from parent co Sunway Berhad and (iii) strong balance sheet with net cash position.

NEWSBREAK

Litigation. SunCon announced that PNSB Acmar Sdn Bhd has served a Writ of Summon and a Statement of Claim both dated 8 Nov 2019 against Prasarana and SunCon. PNSB Acmar is alleging that construction works and structures such as poles, bars, and stations in relation to the LRT3 project had trespassed and encroached into their own development project area and has resulted in losses and damages. Recall that Prasarana is the owner of the LRT3 project and SunCon is the work package contractor for 6 stations stretching from Kawasan 17 to Sri Andalas in Klang. PNSB Acmar is currently seeking damages amounting to RM712m with an interest rate of 5% from the alleged date of trespass.

HLIB’s VIEW

Background on plaintiff. PNSB Acmar is an unlisted integrated property developer with its flagship development being the 200 acre township of Bandar Baru Klang which will be served by the LRT3 extension. Quick check on their website reveals an ongoing development project of an apartment within Bandar Baru Klang located nearby the ongoing LRT3 project. Details on the website suggest that the condominium will consist of 332 units with listing price ranging from c.RM350k to RM550k. The project sits on a land area of 3.92 acres.

Potential outcome. Based on our checks with management, SunCon maintains that the construction activities for the project has been undertaken within the confines and boundaries presented to them by Prasarana. We reckon the arbitration process may potentially be rather lengthy with damages (if any) likely skewed towards the project owner; SunCon is merely a contractor working based on the dictated designs and specifications. Nonetheless to put things to scale, the amount of damages being claimed by PNSB Acmar (RM712m) amounts to c.5x of SunCon’s annual net profit.

Forecast. Maintain forecasts pending 3Q19 results release on 19th Nov and further clarification from SunCon regarding the litigation.

Maintain BUY, TP: RM2.16. Maintain BUY rating and TP of RM2.16 based on mid FY20 EPS pegged to an unchanged 20x PE. We like SunCon for its (i) good execution track record; (ii) strong support from parent-co Sunway Berhad and (iii) strong balance sheet with net cash position.

Source: Hong Leong Investment Bank Research - 18 Nov 2019