We maintain BUY on Sunway Construction (SunCon) with an unchanged fair value (FV) of RM1.84/share. Our FV is based on 14x FY23F PE, in line with our benchmark for large-cap construction stocks. We also ascribe a 3% premium to reflect our 4-star ESG rating.
SunCon has signed a letter of acceptance issued by Malaysia Rapid Transit System for the proposed construction and completion of Package 1B advance works for station and viaducts together with Package 5 terrestrial viaducts and ancillary structures for Rapid Transit System between Johor Bahru and Singapore (RTS Link).
The total contract sum for both packages won are RM605mil, and will be carried out over a period of 26 months until 2Q2025. We estimate SunCon’s EBIT accretion at RM20mil per year (or 9% of FY24F group EBIT) from the contract.
This is SunCon’s 2nd and 3rd package for RTS Link. SunCon was awarded Package P2A worth RM112mil back in 1QFY22, which has reached 7% completion as at Dec 2022.
YTD projects secured (including the RM1.7bil data centre job) amounts to RM2.4bil, raising its estimated order book to RM5.4bil, +2% from RM5.3bil as at Dec 2022. However, we make no changes to our FY23F-25F earnings as this project is within our replenishment assumption of RM2.9bil.
We may raise our earnings estimates if (i) SunCon wins the main package for MRT3, which is expected to be awarded in 2H2023; or (ii) Vietnam power plant project worth RM6bil that SunCon will commence after Toyo achieves financial close.
Risks include (i) eroding margins from higher-than-expected building material costs and labour shortages; and (ii) shelving of mega projects.
SunCon currently trades at an attractive FY23F PE of 13x, which is 24% below its 5-year average of 17x.
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