KEY INVESTMENT HIGHLIGHTS

• Awarded two in-house contracts worth of RM865.9m, lifting its YTD job wins to RM2.0b which is the group’s FY20 target

• Secured first contract worth about RM253.6m for the commercial development of Sunway Velocity Two - Plot B

• Clinched the second project with a value of about RM612.3m for the Sunway Medical Centre’s fourth phase

• Strong outstanding order book of about RM6.4b which translates into earnings visibility for the next three years

• Reiterate BUY with an unchanged target price at RM2.14

Achieving FY20 target of new job wins. Sunway Construction Group Berhad (SCGB) has accepted two Letter of Awards for in-house projects on 30th Sept 2020 worth a total of RM865.9m, with a net addition of RM415.9m to order book as the remaining RM450.0m has been accounted for previously. As a result, this has boosted the group’s new order book in FY20 to about RM2.0b, thereby attaining its new order book target of RM2.0b this year. This is in spite of the advent of Covid- 19 outbreak and extended recovery movement control order (RMCO). Thus, we opine that this is a positive development to showcase the group’s management in committing to achieve its stated goals.

The Sunway Velocity Two (SVT) project. The first project worth about RM253.6m was awarded by Sunway Velocity Two Sdn Bhd for the commercial development of Sunway Velocity Two - Plot B Project (“V2 Project”), which involves the construction of two storeys of business premises, eight floors of podium car park, one level of basement carpark, and two 30-storey blocks of serviced apartments. This project is expected to commence in November 2020, with completion scheduled in September 2023. To recall, the Sunway Velocity Two is divided into three plots whereby Plot A will have two residential blocks, an officer tower and retail units, Plot B will have two residential blocks and retail units, and Plot C, an office tower.

The expansion of Sunway Medical Centre. The second contract clinched with a total value of RM612.3 was awarded by Sunway Medical Centre Sdn Bhd for the centre’s fourth phase (“SMC4 Project”) which includes the construction of two medical centres of 15 storeys and 10 storeys each, 9 floors of elevated parking, a 16-storey hotel suits, and a 9-storey private medical centre. Out of the total contract sum, we understand that RM450.0m has been accounted for in the existing order book since the receipt of the letter of intent dated 1 June 2018.

Solid outstanding order book to underpin earnings momentum. We believe that the group’s current outstanding order book currently stands at about RM6.4b inclusive of the newly announced projects, which will translate to an earnings visibility over the next three years.

Meanwhile, we also postulate that the group might possibly exceed its job replenishment rate of RM2.0b in FY20, premised on its outstanding tender book of about RM8.4b with more than half from abroad (i.e. India, Singapore and Philippines), as part of its overseas expansion strategy. Note that the group has clinched its 8th highway project in India during 1QFY20 worth about RM508m. We do not discount the possibility of more construction project wins from India in 4QCY20.

Earnings estimates. We are making no changes to our earnings estimates as the contract value falls within our job replenishment assumptions.

Target price. We are maintaining our TP to RM2.14 by pegging an unchanged PER of 18.0x to the group’s FY21 EPS of 11.9sen. Note that the target PER is +1.5SD premium above the group’s two-year historical average. We opine that the premium is justified given the group’s solid order book replenishment rate, sound balance sheet and continued job flows from its parent company.

Reiterate BUY. We are of the view that two new in-house job flows to be a positive development for the group In the near term, we expect that the group’s revenue and earnings prospects remain healthy in anticipation of recovery in 2HFY20 earnings following the resumption of construction and business activities and increased workforce capacity at work sites as seen during the Recovery MCO period. Coupled with its focus for oversea expansion, we remain sanguine on the group’s prospects as its job replenishments rate remains bright in which it could possibly exceed its RM2.0b order book for FY20. On a longer term horizon, the group’s prospect is also well-supported by its strong outstanding order book of about RM6.4b which will provide earnings visibility over the next three years. Notably, we posit that SCGB could be one of the main beneficiaries from the revival of Johor-Singapore Rail Transit System project given its existing workforce and two precast concrete manufacturing plants in Johor. The impending revival of mega public infra projects such as MRT3 and KLSG HSR to also be an upward re-rating catalyst. All factors considered, we reiterate our BUY recommendation on SCGB.

Source: MIDF Research - 1 Oct 2020