Upside potential seen in FY20 job flows for Sunway Construction

Sunway Construction Group Bhd
(Jan 31, RM1.81)
Maintain buy with an unchanged target price of RM2.30:The management is targeting to secure RM2 billion worth of jobs for financial year 2020 (FY20). These jobs do not include potential contract wins from the upcoming East Coast Rail Link (ECRL) tenders, the Penang Transport Master Plan (PTMP) and foreign jobs.

Given Sunway Construction Group Bhd’s (SunCon) sizeable outstanding tender book of RM7.4 billion (as of September 2019) and buoyed by a backdrop of recovering job flows, we reckon there is an upside potential for FY20. Recall that the company has consistently exceeded its replenishment targets over the past three years.

For FY20, SunCon is pencilling in RM800 million worth of jobs to be awarded by its parent company. This translates into about 40% of job wins for FY20 (FY19: 17%). For external building jobs, the management is expecting RM500 million worth of awards this year from superstructure works of Putrajaya Transit Oriented Development (piling was done by SunCon) as well as a tender for the construction of the KLCC retail podium (the car park was constructed by SunCon).

On its geotechnical side, the group aims to win RM300 million worth of jobs as the outlook for piling in Singapore looks positive on the back of infra project rollouts compounded by a shortage of piling capacity. The remaining RM400 million will be from solar-related jobs and precasts.

Its segmental pre-tax margin should normalise back to 10% for FY20 as contributions from old low-margin jobs taper off.

SunCon will be participating in the upcoming ECRL tenders as well as the PTMP. The Bayan Lepas Light Rail Transit (BLLRT) is expected to be rolled out soon given that the state government has secured a federal guarantee for the issuance of RM10 billion sukuk to fund the BLLRT which will reportedly cost RM8.5 billion.

Some have suggested that post-signing of the project delivery partner  agreement, awards for the railway project may proceed in June 2020. As for the ECRL, we understand from the management so far things have been quiet. Expectations are for tender awards by the first quarter of 2020.

As a result of a domestic construction slowdown post-general election 14, Suncon has been actively exploring regional opportunities in the past year. In Myanmar, SunCon previously entered into a memorandum of understanding with Myanmar conglomerate Cash Diamond Star Group (CDSG) in which internal projects will be undertaken by CDSG and SunCon Joint Venture.

The LRT Line 3 project is progressing and will accelerate in FY20. We gather that the project is currently 30% completed. —Hong Leong Investment Bank Research, Jan 31