Management is targeting RM2bn worth of jobs in FY20 excluding potential contract wins from the upcoming ECRL tenders, wins from PTMP as well as foreign job awards. Precast segmental PBT margin should normalize back to 10% in FY20. SunCon has recently submitted a tender for an Indian highway worth RM500m. LRT3 project is currently 30% completed on an overall basis. Maintain forecast and BUY with unchanged TP of RM2.30, based on an unchanged 20x PE multiple tagged to FY20 earnings.

We recently met up with SunCon’s management (represented by its CFO) with the following key takeaways:

Conservative replenishment target. Management is targeting to secure RM2bn worth of jobs in FY20. These jobs do not include potential contract wins from the upcoming ECRL tenders, PTMP and foreign jobs. Given SunCon’s sizable outstanding tenderbook of RM7.4b (as of Sept-19) and buoyed by a backdrop of recovering job flows, we reckon there is upside potential in FY20. Recall that the company has consistently exceeded replenishment targets over the past 3 years.

Balanced mix. For FY20, SunCon is pencilling in RM800m worth of jobs to be awarded by its parent-co. This translates to c.40% of job wins from parent-co for FY20 (FY19: c.17%). For external building jobs, management is expecting RM500m worth of awards this year to be contributed by superstructure works for Putrajaya TOD (piling was done by SunCon) as well as tender for construction of KLCC retail podium (car park was constructed by SunCon). On its geotechnical side, the group aims to win RM300m worth of jobs as the outlook for piling in Singapore looks positive on the back of infra project rollouts compounded by a shortage of piling capacity. The remaining RM400m will be from solar related jobs and precast.

Precast. Segmental PBT margin should normalize back to 10% in FY20 as contribution from old low margin jobs taper off.

Infrastructure works. SunCon will be participating in the upcoming ECRL tenders as well as PTMP. The Bayan Lepas LRT (BLLRT) is expected to be rolled out soon given that the state government has secured federal guarantee for the issuance of RM10b sukuk meant to fund the BLLRT which will reportedly cost RM8.5b. Some have suggested that post-signing of the PDP agreement, awards for the railway project may proceed in June-2020. As for the ECRL, we understand from management so far things have been quiet. However, expectations are for tender awards by 1Q20.

Foreign jobs. As a result of a domestic construction slowdown post GE14, Suncon has been actively exploring regional opportunities in the past year. In Myanmar, SunCon previously entered into MoU with Myanmar conglomerate CDSG in which internal projects will be undertaken by CDSG and SunCon JV. A budget readjustment resulted changes in designs delaying awards last year but moving forward, an award should materialise. SunCon, has recently submitted a tender for an Indian highway worth RM500m after repeated extensions by the authorities. We understand the funding model enables SunCon to undertake no traffic volume risk.

Existing jobs. Existing orderbook amount to RM5.2b translating into decent level of 2.3x cover based on FY18 revenue. LRT3 project is progressing and will accelerate in FY20. We gather that project is currently 30% completed.

Forecast. Maintained as the meeting yielded no major surprises.

Maintain BUY, TP: RM2.30. Maintain BUY with unchanged TP of RM2.30, based on an unchanged 20x PE multiple tagged to FY20 earnings. We like SunCon due to (i) strong balance sheet (ii) positive earnings trajectory and (iii) strong support from parent-co.

Source: Hong Leong Investment Bank Research - 31 Jan 2020