SunCon to ride on multiple MRT3, LRT3 bids in FY23

Recommendation: Buy Target Price: RM1.86
By Hong Leong Investment Bank Bhd (Oct 18) 

KEY developments for Sunway Construction Group Bhd’s (SunCon) tender activities are mainly its bids for Mass Rapid Transit Line 3’s (MRT3) CMC301 and CMC302 packages which are the project’s elevated sections. Both bids are undertaken through a JV/consortium with SunCon holding majority stakes. We gather that these partners are privately-owned contractors experienced in the field of domestic infrastructure construction. 

Outside of MRT3, the company could still secure roughly RM200m-RM300m from parent-co this year for a residential project while tenders for external commercial projects are still outstanding. SunCon could also benefit from increased scope of Light Rail Transit Line 3 (LRT3) should it materialise next year. We gather that majority of replenishment source from parent-co has been pushed into next year due to changes in planning. 

Labour. The company has started receiving more workers of late. Management expects to receive roughly 250 foreign workers by end-October and would bring their tally of direct foreign hires to ~400-500. 

Precast kicker next year. SunCon’s 49%-owned integrated construction and prefabrication Hub (ICPH) precast plant in Singapore is undergoing commissioning process and could start operations before year end. According to management, estimated payback period is 9 years. SunCon’s 49% stake capital expenditure spent comes to S$80m of which S$12.6m amounts to land costs. We expect the plant to ramp up and start contributing posi

tively by early-2023. The ICPH plant is a fully robotic automated precast plant located in Pulau Punggol Barat, Singapore. With this, SunCon’s precast product range expands to comprise large panel slabs, precast walls and tunnels for infrastructure projects (versus currently mainly prefab bathroom units). 

Expecting a weaker 2H22. After a strong 1H22 showing (1H22 Core PATAMI: RM72.1m), SunCon’s 2H22 performance could turn in relatively weaker. This downward normalisation is due to 1H22 being a beneficiary of several projects approaching the tail end bringing with it release of buffers to the profit and loss. As newly secured projects are still ramping up, earnings recognition cycle is not yet strong. Add to this the labour supply issues affecting the sector from productivity and cost inflation impact, we now expect weaker sequential top-line and slight margin deterioration. 

Forecasts. Tweak FY22 and FY23 forecasts down by -5.4%/1.3% but increase FY24 forecasts by 4.5%. Adjustments are due to delaying orderbook replenishments to next year and slower contribution from ICPH precast plant. 

Maintain ‘Buy’, TP: RM1.86. Maintain ‘Buy’ with marginally lower TP of RM1.86 (from RM1.90) post-minor tweaks to earnings. TP is derived by pegging mid FY22 EPS to 15x ex-cash P/E. SunCon is well positioned to partake in various infrastructure rollouts ahead. Our base case of no major policy changes post GE leads us to see current share price weakness as a good entry point. We like the stock for its healthy balance sheet (NCPS: RM0.30), track record and strong support from parent-co. 

Risks. Change in government policies, prolonged elevated materials prices and labour shortage.

  • This article first appeared in The Malaysian Reserve weekly print edition