· Direct proxy to infrastructure boom. As SUNCON possesses excellent track records in three major urban public transportation projects, namely LRT, MRT and BRT, we reckon that the group should also benefit from the up and coming infrastructure projects under 11MP. Among the projects are: MRT2 (RM28.0b) and LRT3 (RM9.0b). We also understand that the government is planning to implement the 34km KL-Klang BRT Corridor to ease traffic congestion. We believe SUNCON will benefit from this project as well due to its excellent track records in Sunway BRT Line job, which was completed ahead of schedule.

· Visible earnings backed by strong orderbook of RM2.8b. As at end-1Q15, SUNCON’s outstanding orderbook stands at RM2.8b. This provides earnings visibility for the next 2-3 years which is in line with its peer’s earnings visibility.

· To replenish another RM1.5b new jobs this year? YTD, the group has already secured approximately about RM500.0m worth of new orders. Management remains confident that it will reach RM2.0b new wins in FY15. The group hopes to secure building jobs in Putrajaya worth about RM1.5b before the end of the year to meet the target new wins of RM2.0b.

· Well-supported by the parent company. As most of Sunway Group’s property projects are built by SUNCON, we believe the group’s parent company will continue to dish out property jobs to SUNCON. Historically, on average, the parent company Sunway Group farmed out about RM500.0m jobs to SUNCON yearly. Upon listing, SUNWAY will still be the largest shareholder, owning 55.6% of SUNCON’s stake.

· Precast segment’s good prospects and fat margins to continue supporting bottomline. Precast division contributes 13.0% of the group’s outstanding orderbook of RM2.8b. Management expects the orderbook to maintain at the current level of RM300.0-400.0m every year driven by strong precast concrete products demand in Singapore, mostly used for their public housing and infrastructure projects. Note that this segment is the main contributor to the group’s bottomline i.e. 66.0% of FY14 PBT thanks to strong profit margins achieved (i.e. 3-year average PBT margin: 25.3%).

· Dividend policy of minimum 35.0% payout. We like the fact that the group has dividend policy of minimum payout of 35.0% per annum. Based on this payout ratio, its dividend yield stands at 3.0%, which is at the higher range of other contractors’ yield of 2.0-3.0%.

· Forecasts. We expect the group’s net profit to grow by 25.7% in FY15 and decline by 9.7% in FY16 after taking into account: (i) orderbook replenishment target of RM2.0-RM1.5b in FY15-16E, (ii) burn rate of 67.0%-51.0% in FY15- 16E, (iii) net margin forecasts of 6.6-7.0% in FY15-16E. Negative growth in FY16 is understandable due to the orderbook recognition timing (majority ends in FY15). However, we expect growth to pick up from FY17 onwards by 16.4% assuming they continue to replenish orderbook of minimum RM1.5b.

· Well-integrated construction group. SUNCON will be able to offer full package of construction services to their clients, which makes them more competitive against their peers. In terms of comparison, the group’s orderbook size is rather similar to its peer namely WCT (market cap of RM1.5-2.0b). In terms of margins, SUNCON may be slightly lower by 0.6ppts (construction EBIT margin) than WCT but we like to highlight that SUNCON has a stronger balance sheet position, i.e. in a net cash condition.

· TRADING BUY (FV: RM1.40), based on 14.0x FY16E PER. SUNCON is set to be listed by today. Note that SUNCON’s IPO price implies FY15E and FY16E PER of 10.8x and 12.0x, respectively. We recommend TRADING BUY with the potential upside and dividend yield of 16.7% and 3.0%, respectively. Despite the negative growth in FY16E, we are ascribing 14.0x to FY16E EPS, in line with our target PER for WCT’s construction division of 14.0x and target PER range for small-mid cap peers of 10.0-14.0x. We believe SUNCON deserves a higher range of PER valuation due to the group’s position as a pure construction player with strong net cash position and is positioned to benefit from the sector’s bright prospects.

Source: Kenanga Research - 28 Jul 2015