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This article first appeared in The Edge Financial Daily on March 20, 2019

Sunway Construction Group Bhd
(March 19, RM1.85)
Maintain hold with an unchanged target price (TP) of RM1.66:
Sunway Construction Group Bhd (SunCon) is the largest listed construction pure play in Malaysia. Given its strong track record, we think SunCon will remain relevant for public and private sector projects despite the current more challenging construction landscape. SunCon has also established itself as the only construction specialist involved in all three Rapid Line infrastructure projects — the mass rapid transit, light rail transit (LRT) and bus rapid transit.

 

At the current valuations, we prefer exposure to the larger-cap contractors trading at cheaper or parity valuations and are more diversified. Until we see a more sustained roll-out in government infrastructure projects, we think purer play contractors such as SunCon should trade at a discount to the larger ones. Still, we acknowledged SunCon’s solid execution track record, net cash balance sheet and sustainable dividend payout.

SunCon’s new order wins in financial year 2018 (FY18) moderated to RM1.6 billion after hitting RM4 billion in FY17. Its FY19 forecast new win target has been set at RM1.5 billion with an equal distribution between internal and external jobs. Year-to-date wins amount to RM781 million, including the Tenaga Nasional Bhd project. In our view, a flawless execution track record, a faster recovery in its precast division leading to a potential uplift in earnings and a sustained dividend payout could be the next catalysts for the stock. While we have factored in the reduced contract values for its LRT3 project, the build-up in receivables and collection for the project remains in question.

Our TP is based on a sum-of-parts valuation to reflect a growing contribution from its high-margin precast business. We believe pure-play construction players should at least trade at parity to its more diversified larger-cap peers in times of rising government development expenditure. The timely execution of its peak order book is crucial to minimising 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. — AllianceDBS Research, March 19

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