Given  the  significant  re-rating  in  the  big-cap  construction  stocks  in Malaysia lately , we think it is a good opportunity to accumulate Sunway. Maintain BUY with a higher TP of MYR4.18  (20% upside). Unlike other property  stocks  which  currently  suffer  from  weak  property  sales, Sunway  has  a  different  angle  as  it  will  list  its  Sunway  Construction soon. Investors should look forward to a windfall dividend payout.

Sunway  –  an  alternative  construction  play.  Given  the  6-7% appreciation in KL Construction Index YTD, we think Sunway should play catch-up given that it is embarking on a value-unlocking plan  to list its construction  arm,  the  Sunway  Construction  Group  (SCG).  We  argue that,  although  property  and  property-related  earnings made  up  58% of FY14  net  earnings,  Sunway  now  has  a  different  angle  as  it  offers investors  an  alternative  for  exposure  to  the  construction  sector.  The construction segment contributed about MYR120m or 20% of PATMI in FY14,  an  earnings  base  that  is  almost  equivalent  to  that  of  WCT (WCTHG MK, SELL, TP: MYR1.40).

Strong  potential  in  SCG.  SCG  is  one  of  the  largest  construction companies in Malaysia and,  by revenue size, it  will be the largest listed pure-play  construction  upon  listing.  Sunway’s  construction  orderbook currently stands at MYR3bn, of which 53% is comprised of external jobs, 37% in-house works and 10% precast contracts. It also has exposure to the  MRT1  and  LRT  jobs,  which  are  amongst  the  key  infrastructure developments  that  the  Government  has  decided  to  maintain  in  the revised Budget 2015. With these exposures,  we believe  Sunway is  in a better position to bid for more MRT2 jobs going forward.

Sunway’s segmental valuations at a discount to construction peers. The  top  three  construction  peers’  market-cap  weighted  average  P/E  is currently  15.2x.  Based  on  the  blended  average  P/E  (by  ascribing  12x P/E for the  property and  14x for the construction division)  in our opinion Sunway should deserve a higher P/E multiple of around 11.5-12x.   

BUY, TP raised to MYR4.18.  Sunway  is our top property pick.  Maintain BUY.  As  we  update  our  RNAV  with  the  latest  FY14  balance  sheet numbers, our SOP-based TP is raised to MYR4.18  (from MYR3.90).  To be prudent, our valuation assumption for SCG is unchanged at 13x P/E. Upon listing, investors may  also  get a dividend windfall worth 35-40 sen (cash + dividend-in-specie) on top of a normal dividend payout of 11 sen.

Source: RHB Research - 20 Mar 2015