Strong and steady

Malaysia?s leading pure construction player. Sunway Construction Group (SCG) is the largest listed pure play construction company in Malaysia. Given its strong track record with MRT, LRT and BRT jobs previously, we are of the view that SCG is on a strong footing to bag several key infrastructure packages such as LRT3 and BRT as well as other infrastructure- related and building projects. SCG has also established itself as the only construction specialist to be involved in all three Rapid Line infra projects (MRT, LRT and BRT). This makes the group one of the strongest contenders to win the pipeline of 11MP projects.

Riding on Singapore?s public housing development. Its precast division is a strong proxy to the growing demand for HDB residences in Singapore, where the government is targeting to build an additional 88,000 units of public housing in FY16-FY19. With premium EBIT margins recorded over the past few years, the business is ROE-enhancing and also synergistic to its construction business. We estimate that for every incremental RM200m new wins will raise our FY17F forecast by 6% vs 1% for construction wins.

More modest RM2bn order win guidance for FY17F. Not one to rest on its laurels, SCG will be bidding for LRT 3 (already prequalified), private and public sector building jobs and the internal projects from the property arm of its holding company. 2016 wins reached RM2.6bn (including precast) which exceeded its RM2.5bn guidance. For FY17F, it is guiding for RM2bn worth of new wins which should come from a combination of LRT3, internal jobs, precast projects and some other private sector building jobs.

Valuation

BUY, TP set at RM 1.92. Our TP is based on sum-of-parts (SOP) valuation to reflect the growing contribution from its high- margin precast business. While our SOP value is RM2.77bn or RM2.14/share, we have ascribed a 10% discount to arrive at our target price of RM1.92.

Key Risks to Our View

The timely execution of its peak orderbook of RM5bn is crucial to minimise the risk of any earnings cuts. With its strong execution track record and experience, we believe the group is able to execute the projects in a timely manner.

Source: Alliance Research - 16 Jan 2017