Sunway Bhd
(March 20, RM3.49)
Maintain buy with higher target price of RM4.18 from RM3.90 previously. Given the 6% to 7% appreciation in the Kuala Lumpur construction index year-to-date, 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 financial year 2014 (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 RM120 million or 20% of profit after tax and minority interest in FY14, an earnings base that is almost equivalent to that of WCT Holdings Bhd. 

SCG is one of the largest construction companies in Malaysia and, by revenue size, it will be the largest listed pure-play construction company upon listing. 

Sunway’s construction order book currently stands at RM3 billion, of which 53% comprises external jobs, 37% in-house works and 10% precast contracts. 

It also has exposure to the Klang Valley Mass Rapid Transit (MRT1) and Light Rail Transit jobs, which are among 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. 

The top three construction peers’ market capitalisation-weighted average price-earnings ratio (PER) is currently 15.2 times. 

Based on the blended average PER, by ascribing 12 times PER for the property and 14 times for the construction division, in our opinion, Sunway should deserve a higher PER of around 11.5 times to 12 times. Sunway is our top property pick.

As we update our revalued net asset value with the latest financial year 2014 balance sheet numbers, our sum-of-parts-(SoP) based target price is raised to RM4.18 from RM3.90. 

To be prudent, our valuation assumption for SCG is unchanged at 13 times PER. Upon listing, investors may also get a dividend windfall worth 35 sen to 40 sen on top of a normal dividend payout of 11 sen. — RHB Research, March 20

This article first appeared in The Edge Financial Daily, on March 23, 2015.