We upgrade Sunway Construction (Suncon) to BUY from Hold with an unchanged 12M TP of RM2.45, based on a 10% discount to RNAV. We believe Suncon is an apolitical pure-play contractor that provides good construction sector exposure, with strong prospects to replenish its order book given its excellent track record. We hosted an investor meeting for Suncon recently. The company expects to secure RM1.5-2.0bn of new contracts in 2018. We lift our 2018-20E EPS by 2-3% to reflect higher interest income given higher FCF.

Strong In-house Project Pipeline

Sunway Construction’s parent company, Sunway Bhd, plans to build 5 hospitals nationwide in: 1) Sunway Velocity, Kuala Lumpur (1Q19 completion); 2) Seberang Jaya, Penang (2020); 3) Ipoh, Perak (2022); 4) Damansara, Selangor (2023); and 5) Iskandar Puteri, Johor. Each hospital will have about 250 beds and cost about RM250-300m. Suncon has the first right of refusal to build the hospitals, assuming it puts in a competitive bid. Its major ongoing in-house projects include Sunway Medical Centre Phase 4; Sunway Velocity hotel, office and medical centre; and Sunway Serene serviced apartments.

Good External Contract Prospects

Its high remaining order book of RM6.14b, equivalent to 3x its 2017 revenue, provides good earnings visibility and should sustain its construction activities up to 2Q 2021. It has submitted tenders for over RM2bn worth of projects. In addition to in-house projects, Suncon is also bidding for external projects such as the Tenaga Headquarters redevelopment; Daya Bumi Phase 3 offices and hotel; and Bukit Bintang City Centre office tower.

Well-positioned for Future Infrastructure Jobs

Although Suncon and its partners lost the bid to be the Project Delivery Partner (PDP) for the KL-Singapore High Speed Rail (HSR) project, it can still bid for station-building works and infrastructure works. There are 6-7 stations planned and each costs about RM2bn. We assume that Suncon will secure RM2bn in new contracts in both FY18E and FY19E.

Upgrade to BUY

We upgrade our call on Suncon to BUY from Hold as the recent shareprice correction provides an opportunity to accumulate the stock. Potential total return is 13.6%, which includes a net dividend yield of 3.2% in FY18E. The current share price is also supported by a high net cash position of RM353m or RM0.27/share.

Source: Affin Hwang Research - 3 May 2018