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This article first appeared in The Edge Financial Daily on February 21, 2019

Sunway Construction Group Bhd
(Feb 20, RM1.76)
Maintain underperform with a target price (TP) of RM1.40:
Yesterday, Sunway Construction Group Bhd (SunCon) announced that it had won a construction job from Tenaga Nasional Bhd (TNB) worth RM781.3 million. The scope of work includes the proposed construction of four office towers, one convention centre, one interactive centre for electricity, childcare facility and other facilities to house TNB’s employees. The construction work for the campus is expected to be completed within 26 months upon commencement, shorter compared with typical high-rise jobs, which easily takes up to 36 months. We believe that the shorter construction timeline is solely on superstructure works as the substructure works for the campus could be completed prior to this award.

 

This is SunCon’s first contract win for the year and one of the largest to date. While the contract award of  RM781.3 million came in within our and management’s replenishment target of RM1.5 billion for financial year 2019 (FY19), the construction timeline for this particular contract came in as a surprise to us as it is 10 months shorter compared with our assumptions of 36 months. Assuming a pre-tax margin of 8%, this contract would contribute around RM21.6 million to its bottom line per annum.

However, the outlook of the sector remains uncertain due to the recent review of government spending on infrastructure jobs. However, we believe strong players like SunCon can weather through these challenging times given their strong parent’s (Sunway Bhd) support and competitiveness to secure huge jobs from the private sector. For its upcoming fourth quarter FY18 result that is set to be released on Feb 25, 2019, we expect SunCon to register a performance that falls within our expectations.

Following this contract win, we raised our FY19E (estimate) core net profit by 8%, as we have factored in the shorter execution timeline for this project.

Therefore, we maintain our call of “underperforming” due to the strong performance of its share price, which has registered a year-to-date gain of 24.8%. Following the revision in earnings, we also raised our sum-of-parts-driven TP higher to RM1.40 (previously RM1.30). We ascribed 11 times FY19E price-earnings ratio which is the highest valuation range within our stock coverage universe range of six to 11 times. — Kenanga Research, Feb 20

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