KEY INVESTMENT HIGHLIGHTS

• Awarded second Indian highway project worth of RM315.0m, lifting its YTD job wins from India to RM823.0m

• Secured three new external solar roof top projects from F&N group of companies worth about RM18.1m

• This brings its total YTD job wins in FY20 to about RM2.3b

• Strong outstanding order book of about RM5.4b which translates into earnings visibility for the next 2-3 years

• Revival of mega public infra projects to be positive catalyst

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

India to drive overseas’ earnings. The 60-40 consortium formed by Sunway Construction Group Berhad (SCGB) and its long-time joint venture Indian partner respectively has accepted one Letter of Award (LOA) for its 2nd Hybrid Annuity Mode (HAM) Indian highway project, involving the construction of two laning with Paved Shoulder of Meensurutti to Chidambaram (“MC Project” as depicted in Graph 2)

from the National Highways Authority of India (NHAI) on 28 October 2020 (refer to Table 1 for further details). This has boosted its YTD job wins from India to RM823.0m or 35.5% of the total new order book in FY20. The MC Project is expected to be commenced within 195 days from the LOA. Note that this is the group’s 9th highway project in India thus far since its venture into the country. Thus, we view that this is a positive development to showcase the group’s capability and strong track record in securing major overseas contracts, especially from India in spite of the advent of rampant Covid-19 outbreak.

Securing emerging segment of solar jobs. The group has secured three LOAs amounting to RM18.1m combined for solar roof top contracts from F&N Group of Companies for the Design, Supply, Deliver, Install, Commission and Apply and Secure the Sustainable Energy Development Authority (SEDA) Quota for Solar Photovoltaic System. The LOAs are awarded by: (1) Borneo Springs S/B at Karak, Pahang (“BS Project”) worth about RM1.3m, (2) F&N Dairies Manufacturing S/B at Pulau Indah, Selangor (“FNDM Project”) worth about RM6.6m, (3) F&N Beverages Manufacturing S/B at Shah Alam, Selangor (“FNBM”) worth about RM10.2m. All of the above projects are expected to be completed within 12 months from the date of commencement. To recall, the group also secured similar projects from various clients with a contract sum of RM7.0m in early FY20. With the rising popularity and push for the solar renewable energy segment in the region, we postulate that the completion of the above solar projects will enable SCGB to have a track record and make further in-roads into this burgeoning space. Moving forward, we also do not discount further contract awards for construction projects in this segment

Solid outstanding order book to sustain earnings momentum. We believe that the group’s current outstanding order book stands at about RM5.4b inclusive of the newly announced projects, which will translate to a strong earnings visibility over the next three years. Meanwhile, the group has successfully achieved and exceeded its target new orderbook of RM2.0b in FY20 by about +15%. Further job wins could be still in the pipeline for the rest of the year, premised on its outstanding tender book of about RM8.0b with more than half from abroad (i.e. India, Singapore and Philippines), as part of its overseas expansion strategy.

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 remain sanguine on the group’s defensive and quality earnings outlook, predicating on its strong current outstanding order book and prompt resumption of work operations. The second major Indian highway project clinched to be a positive development for the group in expanding its overseas footprints. In addition, the solar roof top project wins could propel the group into the burgeoning solar renewable energy segment in the foreseeable future. In the near term, we expect that the group’s revenue and earnings prospects remain healthy in anticipation of recovery in 2HFY20 earnings as construction is deemed as essential service even during CMCO. Coupled with its focus for overseas expansion, we remain optimistic on the group’s prospects as its job replenishments rate remains bright moving into FY21. On the intermediate term, the group’s prospect is also well-supported by its strong outstanding order book of about RM5.4b 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 ahead of Budget 2021 to also be an upward re-rating catalyst. All factors considered, we reiterate our BUY recommendation on SCGB.

Source: MIDF Research - 2 Nov 2020