KUALA LUMPUR: When Sunway Bhd, controlled by tycoon Tan Sri Jeffrey Cheah, proposed to list its construction arm — Sunway Construction Group Bhd — in September last year, the construction industry was deemed to be a sector to look out for, with optimism stemming from a slew of mega projects expected to commence these few years as stated in Budget 2015.
Little did analysts know that global oil prices were to fall sharply, which then triggered fresh concerns about the government’s ability to carry out some of these projects as planned. A potential tighter spending from the government would have an adverse impact on the construction sector outlook, apart from the much affected oil and gas industry with Petroliam Nasional Bhd already stating a review of its capital expenditure.
As the local stock market tumbled nearer to the psychologically important 1,700 points yesterday, reflecting these concerns, the Securities Commission Malaysia had released Sunway Construction’s draft prospectus on its website, indicating that the company’s listing exercise is on track amid such headwinds in the market.
The Sunway Construction exercise will not involve the issuance of new shares to raise proceeds for its operations. Rather, the listing exercise is via its parent Sunway distributing a certain number of shares in the construction outfit to Sunway shareholders, while making an offer for sale of a stake in the construction unit.
Reuters, citing bankers familiar with the matter, reported that the sale in mid-2015 will raise up to US$200 million (RM710 million) for Sunway.
According to the draft prospectus, Sunway Construction’s net profit grew 5.3% to RM60.73 million in the cumulative eight months to Aug 31, of financial year 2014 (8MFY14) from RM58.41 million in the same period a year ago, while revenue dipped 1.1% to RM1.17 billion from RM1.18 billion previously.
In FY13 ended Dec 31, the company’s net profit and revenue amounted to RM66.93 million and RM1.84 billion respectively, rising from RM54.79 million and RM1.45 billion in FY12.
Assuming a rich 15 times price-earnings ratio (PER) on an annualised 2014 earnings of RM91 million, Sunway Construction could be valued at some RM1.37 billion. Having said that, 15 times PER is accorded to top-rated construction-cum- property development and infrastructure players such as Gamuda Bhd and IJM Corp Bhd. For Sunway Construction, its mainstay will be on construction and building materials, as parent Sunway will focus on property development.
The ability of Sunway Construction and its peers to win more contracts in 2015 will be closely watched as the government begins to face more constraints in its revenue due to sharply lower oil prices.
As with most construction players, the bulk of Sunway Construction’s RM3.6 billion order book comprises government jobs, which account for 64% or RM2.19 billion. Its largest project is the Klang Valley mass rapid transit (MRT) package V4 worth RM1.17 billion, followed by light rail transit (LRT) Package B (RM569 million) and Sunway bus rapid transit (BRT) (RM452.52 million).
Despite the general worries about the government’s fiscal position, Kenanga Research analyst Iqbal Zainal maintains overweight on the construction sector.
“I believe that the construction sector is expected to stay positive in the next three to five years, with more industry news to flow this year. Sunway Construction has a good construction track record and has a sizeable chunk of public transportation projects. The listing should augur well for them,” Iqbal told The Edge Financial Daily in a brief telephone conversation.
According to Smith Zander International, commissioned by Sunway Construction to conduct a report for its listing, the domestic construction industry is expected to grow from RM118.1 billion to RM173 billion in 2017 “underpinned by the high-impact projects announced under the 10th Malaysia Plan (10MP), the Economic Transformation Programme (ETP) and Budget 2015, which are expected to catalyse the construction industry”.
Some of the major ongoing and upcoming projects highlighted by Smith Zander include the RM55 billion Klang Valley MRT project (KVMRT), the RM7 billion LRT extension, the RM12 billion Kuala Lumpur-Singapore high-speed rail and the RM60 billion Pengerang independent deepwater petroleum terminal, and refinery and petrochemical integrated development.
However, the report did not assess how the oil price variables could have an impact on the implementation of some of these projects planned by the government, which has already been hit by rising borrowing costs as foreign institutions sold down Malaysian Government Securities (MGS).
While the low oil price factor has a mild impact on some of the near-term projects such as the ongoing LRT extension and KVMRT, for which expenditure has been allocated, the bigger questions lie in the long list of other projects whose timely implementation could be in doubt, depending on how the low oil price could affect the government’s revenue.
Thus far, the government has repeatedly assured that its financials will not be severely affected by low oil prices, but it needs to be more convincing.
This article first appeared in The Edge Financial Daily, on January 7, 2015.