SUNCON has bagged a highway job in India valued at approximately RM500m. The project will be operated under the Hybrid Annuity Model for a concession period of 15 years plus 2-year construction period. This is SUNCON’s first contract win in 2020, on track to meet the group’s fullyear order-book replenishment target of RM2b. Following its share price decline, we upgrade our call to OUTPERFORM with TP of RM1.80 (based on PBV multiple of 3.75x) after switching our valuation methodology to PBV.

First contract win of the year. SUNCON’s 60%-owned Sunway Construction Sdn Bhd – RNS Infrastructure Limited (Consortium) has accepted a Letter of Award issued by the National Highways Authority of India (NHAI) to undertake a 36.8-km highway project in the state of Tamil Nadu in India for a total contract sum of Rs.864.51 Crore (RM498.3m), in addition to a 15-year operating and maintenance contract at Rs.7.08 Crore per annum. (RM4.1m). The construction is expected to commence in Oct 2020 and to be completed within 2 years. A concession agreement will be signed in May 2020. The remaining 40% stake in the Consortium is held by RNS, an Indian local company owned by R.N. Shetty family which is involved in a wide range of infrastructure construction services such as construction of dams, highways, bridges, tunnels, power houses and residential buildings. RNS was SUNCON’S first joint-venture partner when the Group ventured into India in Jun 2001 for its first two infrastructure projects.

Staggered payment mode. The project will be operated under the Hybrid Annuity Model (HAM) for a concession period of 15 years plus 2- year construction period. Under the HAM, NHAI will pay 40% of the project cost in the first two years during the construction period in five equal instalments with the remaining 60% to be paid over 15 years as fixed annuity amount plus interest which is benchmarked at RBI (Reserve Bank of India) rate + 3%. The project has a price fluctuation clause throughout the 2-year construction period and 15 years' maintenance period. There is no toll right for the concessionaire.

On track to hit RM2b target in FY20. With the India highway job in hand, this would bring its outstanding order-book to RM5.7b. SUNCON is on track to meet its full-year new contract wins target of RM2b (which is also our assumption), after replenishing its order-book by RM1.8b last year. No change to our earnings forecasts.

Upgrade to OUTPERFORM. We will be shifting our valuation methodology from PER to PBV for construction stocks (with our updated recommendations and target prices to be published in our 2QCY20 strategy report due next week) in view of the low earnings visibility for the sector. For SUNCON, we have attached a PBV multiple of 3.75x (-1SD below mean) on its BV per share of RM0.48 to derive our TP of RM1.80 (from RM1.82 previously). Our TP also implies FY20 PER of 13.7x. Following the share price drop (-21% since 11 Mar this year), we are upgrading our call from MARKET PERFORM to OUTPERFORM (offering potential total returns of 25%).

Source: Kenanga Research - 27 Mar 2020