Sunway Construction (Suncon) has achieved its new contracts target of RM1.5bn in 2018 and expects to secure another RM1.5bn in 2019. It has submitted RM6bn worth of tenders for local and overseas projects. The construction sector outlook remains challenging, but Suncon’s remaining order book of RM5.2bn provides good earnings visibility. Suncon remains our top sector BUY with a RM2.00 target price, based on a 10% discount to RNAV.

Revision in Contract Values

The government’s review of public-sector projects will likely lead to a reduction in subcontract values and scope of works for Suncon’s RM1.2bn Klang Valley MRT Line 2 (MRT2) and RM2.2bn LRT Line 3 (LRT3) projects. Suncon is looking to complete negotiations with the main contractors of the projects by end-2018 on the revised contract value and designs. We have assumed a reduction of 23% for the MRT2 and 30% for the LRT3 contracts (total reduction of RM0.9bn) in our EPS forecasts.

Competitive in Local Contract Bids

Suncon remains optimistic of its prospects to win new domestic contracts in 2019 despite the slower roll-out of government and private-sector projects. Its parent company, Sunway, continues to launch new property projects and expand its hospitals. “In-house” jobs are expected to contribute about 30% of the RM1.5bn new contract target in 2019. We gather that Suncon is the frontrunner for the RM0.7bn Tenaga headquarters re-development project as it currently undertaking the piling works at the site. It has also submitted tenders for government hospital projects (no opportunities previously as open tenders were not carried out by the previous administration) and will bid for the RM5.2bn Klang Valley Double-tracking packages.

Return to International Markets

Suncon has started pursuing overseas projects, especially in India and Southeast Asia given the slow domestic infrastructure project roll-out currently. The overseas project bids are mainly for highways and city railway projects, on which Suncon has extensive experience.

Resilient Pure Play

We believe Suncon is more resilient than most of its peers as it is in a net cash position (RM0.25/share), has an asset-light model (not involved in the property business), integrated construction capabilities, and is competitive in open tenders with its excellent track record. We reiterate our BUY call with RM2.00 target price, based on a 10% discount to RNAV.

Potential reduction in LRT3 and MRT2 contract values

The renegotiation of the LRT3 and MRT2 contracts could lead to reductions in the scope of works and contract values. Hence, we assume that Suncon’s MRT2 and LRT3 contracts are reduced by 23% from RM1.21bn to RM0.93bn and 30% from RM2.18bn to RM1.53bn respectively in our earnings forecasts. These reduced contract amounts are based on the overall reduction percentages announced by the main contractors of MRT2 and LRT3. The reduction in contract values could be lower than our assumptions as Suncon has completed a substantial portion of the works for the MRT2. But its LRT3 project is still at the early stage of implementation and hence there is still room to reduce the scope of works and contract value. Based on financial progress billings, its MRT2 and LRT3 projects are 57% and 7% complete respectively.

Source: Affin Hwang Research - 12 Dec 2018