Building jobs replenishment; upgrading to Buy We upgrade Sunway Construction (Suncon) to BUY from Hold with an unchanged 12M TP of RM2.45, based on a 10% discount to RNAV. We believe Suncon is an apolitical pure-play contractor that provides good construction sector exposure, with strong prospects to replenish its order book given its excellent track record. We hosted an investor meeting for Suncon recently. The company expects to secure RM1.5-2.0bn of new contracts in 2018. We lift our 2018-20E EPS by 2-3% to reflect higher interest income given higher FCF. Strong in-house project pipeline Sunway Construction s parent company, Sunway Bhd, plans to build 5 hospitals nationwide in: 1) Sunway Velocity, Kuala Lumpur (1Q19 completion); 2) Seberang Jaya, Penang (2020); 3) Ipoh, Perak (2022); 4) Damansara, Selangor (2023); and 5) Iskandar Puteri, Johor. Each hospital will have about 250 beds and cost about RM250-300m. Suncon has the first right of refusal to build the hospitals, assuming it puts in a competitive bid. Its major ongoing in-house projects include Sunway Medical Centre Phase 4; Sunway Velocity hotel, office and medical centre; and Sunway Serene serviced apartments. Good external contract prospects Its high remaining order book of RM6.14b, equivalent to 3x its 2017 revenue, provides good earnings visibility and should sustain its construction activities up to 2Q 2021. It has submitted tenders for over RM2bn worth of projects. In addition to in-house projects, Suncon is also bidding for external projects such as the Tenaga Headquarters redevelopment; Daya Bumi Phase 3 offices and hotel; and Bukit Bintang City Centre office tower. Well-positioned for future infrastructure jobs Although Suncon and its partners lost the bid to be the Project Delivery Partner (PDP) for the KL-Singapore High Speed Rail (HSR) project, it can still bid for station-building works and infrastructure works. There are 6-7 stations planned and each costs about RM2bn. We assume that Suncon will secure RM2bn in new contracts in both FY18E and FY19E. Upgrade to BUY We upgrade our call on Suncon to BUY from Hold as the recent shareprice correction provides an opportunity to accumulate the stock. Potential total return is 13.6%, which includes a net dividend yield of 3.2% in FY18E. The current share price is also supported by a high net cash position of RM353m or RM0.27/share. Earnings & Valuation Summary FYE 31 Dec 2016 2017 2018E 2019E 2020E Revenue (RMm) 1,788.8 2,076.3 2,542.8 2,984.9 3,020.7 EBITDA (RMm) 184.1 200.0 268.7 298.5 299.4 Pretax profit (RMm) 153.7 174.2 239.5 269.1 271.7 Net profit (RMm) 123.5 137.8 181.9 204.4 206.4 EPS (sen) 9.6 10.7 14.1 15.8 16.0 PER (x) 23.2 20.8 15.8 14.0 13.9 Core net profit (RMm) 119.0 135.4 181.9 204.4 206.4 Core EPS (sen) 9.2 10.5 14.1 15.8 16.0 Core EPS growth (%) (12.7) 13.9 34.3 12.4 1.0 Core PER (x) 24.1 21.2 15.8 14.0 13.9 Net DPS (sen) 5.0 7.0 7.0 7.0 8.0 Dividend Yield (%) 2.3 3.2 3.2 3.2 3.6 EV/EBITDA (x) 13.8 12.6 9.2 8.1 7.5 Company Update Sunway Construction SCGB MK Sector: Construction RM2.22 @ 2 May 2018 BUY (upgrade) Upside 10.4% Price Target: RM2.45 Previous Target: RM2.45 (RM) 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Price Performance 1M 3M 12M Absolute +7.8% -12.6% +7.2% Rel to KLCI +8.4% -11.8% +2.4% Stock Data Issued shares (m) 1,292.2 Mkt cap (RMm)/(US$m) 2868.8/729.7 Avg daily vol - 6mth (m) 1.6 52-wk range (RM) 1.92-2.64 1.6 Est free float 23.8% BV per share (RM) 0.43 P/BV (x) 5.2 Net cash/ (debt) (RMm) (4Q17) 352.6 ROE (2018E) 30.3% Derivatives Nil Shariah Compliant Yes Key Shareholder Sunway Bhd 54.4% Sungei Way Corp 10.1% EPF Source: Affin Hwang, Bloomberg 6.4% Loong Chee Wei CFA (603) 2146 7548 cheewei.loong@affinhwang.com Chg in EPS (%) 2.6 2.4 3.1 Affin/Consensus (x) 1.0 1.0 0.9 Source: Company, Affin Hwang forecasts, Bloomberg Page 1 of 6
Bidding for new Singapore precast concrete plant Suncon has tied up with Hong Leong Asia to bid for the Integrated Construction Precast Hub (ICPH) to be built on a 30-year leasehold land plot measuring 4 hectares in Pulau Punggol Barat, Singapore. The fullyautomated robotic precast concrete plant is estimated to cost SGD40m. If it wins the tender, financing the construction of the plant will not be a problem for Suncon given its strong financial position. By developing the ICPH, the Suncon-HL Asia joint venture will seek to supply prefabricated bathroom units for Singapore s new HDB flats by 2019. Better overall profit margin We expect an EBIT margin of 7.7-8.3% for its construction division and 14.9-16.0% for its precast concrete arm in FY18-19E (7.1% and 18.9% respectively in FY17). We expect the overall EBIT margin to improve to 8.6-9.0% in FY18-19E as Suncon has been selective in bidding for new jobs in order to preserve profit margins, while utilising value-engineering methods to improve profitability. Key risks Key downside risks are delays in implementation of public infrastructure projects and cost overruns. Key upside risk is higher-than-expected new contract awards in the current infrastructure boom. Page 2 of 6
Fig 1: Construction order book Project Completion Contract value Outstanding value (RMm) (RMm) Infrastructure MRT V201 (Sg Buloh - Persiaran Dagang) 2Q21 1,213 871 MRT V201 - Advance Works 4Q17 53 19 SUKE + DASH (Bore Piling) 2Q18 34 21 BBCC (Bore Piling) 1Q18 108 78 LRT3: Package GS07-08 4Q20 2178 2150 Building 3,586 3,140 Putrajaya Parcel F 1Q19 1,610 707 KLCC (NEC + Package 2 & 2a) 2Q18 646 98 HUKM (MEP works) 2Q18 66 45 International School of Kuala Lumpur (ISKL) 2Q18 268 133 Gas District Cooling (Plant 1) 3Q18 152 102 PPA1M project in Kota Bharu 1Q20 582 540 Warehouse in Shah Alam 3Q19 70 70 Internal 3,394 1,700 Sunway Velocity Hotel + Office 4Q17 101 3 Sunway Velocity Medical Centre 4Q18 185 128 Sunway Medical Centre 4 (2 towers) 1Q19 428 383 Sunway Iskandar - Citrine Swc Apt 4Q17 213 12 Sunway Geo Retail Shops & Flexi Suites Phase 2 1Q18 244 19 Sunway Iskandar - Emerald Residences 1Q18 175 32 Sunway Iskandar - 88 units shoplots 2Q18 57 13 Sunway Iskandar - Retail Complex/Big Box 4Q17 100 70 Sunway Serene - Serviced Residences 4Q20 449 426 Singapore 1,952 1,088 Precast Various 801 207 Grand total 9,733 6,135 Source: Company Fig 2: New contracts secured Page 3 of 6
Fig 3: RNAV and target price Segments Stake (%) New RNAV (RMm) Construction @ PE 16x avg earnings of RM158m 100 2,528 Pre-cast concrete @ PE 16x avg earnings of RM40m 100 640 Net cash/(debt) 353 RNAV 3,521 No. of shares (m shrs) 1,293 RNAV/share (RM) 2.72 Target price at 10% discount to RNAV/share 2.45 Fig 4: PER and ex-cash PER Year to 31 Dec FY18E FY19E Share price (RM) 2.22 2.22 Net cash/share (RM) 0.27 0.27 Ex-cash share price (RM) 1.95 1.95 EPS ex-interest income (RM) 0.13 0.15 PER (x) 15.8 14.0 Ex-cash PER (x) 14.7 13.1 Fig 5: Construction sector peer comparison Page 4 of 6
Sunway Construction - FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Dec (RMm) 2016 2017 2018E 2019E 2020E FYE 31 Dec (RMm) 2016 2017 2018E 2019E 2020E Revenue 1,788.8 2,076.3 2,542.8 2,984.9 3,020.7 Grow th Operating expenses (1,604.7) (1,876.3) (2,274.2) (2,686.4) (2,721.3) Revenue (%) (6.7) 16.1 22.5 17.4 1.2 EBITDA 184.1 200.0 268.7 298.5 299.4 EBITDA (%) (1.7) 8.6 34.3 11.1 0.3 Depreciation (39.1) (37.8) (40.3) (42.8) (45.2) Core net profit (%) (12.7) 13.8 34.4 12.4 1.0 EBIT 145.1 162.2 228.4 255.8 254.2 Net int income/(expense) 4.1 7.4 9.0 11.2 15.4 Profitability Associates' contribution 0.0 2.2 2.2 2.2 2.2 EBITDA margin (%) 10.3 9.6 10.6 10.0 9.9 Forex gain/(loss) (0.0) 0.1 0.0 0.0 0.0 PBT margin (%) 8.6 8.4 9.4 9.0 9.0 Exceptional gain/(loss) 4.5 2.3 0.0 0.0 0.0 Net profit margin (%) 6.9 6.6 7.2 6.8 6.8 Pretax profit 153.7 174.2 239.5 269.1 271.7 Effective tax rate (%) 19.5 20.8 24.0 24.0 24.0 Tax (30.0) (36.2) (57.5) (64.6) (65.2) ROA (%) 3.9 3.8 4.5 4.3 4.2 Minority interest (0.1) (0.1) (0.1) (0.1) (0.1) Core ROE (%) 25.2 25.9 30.3 29.1 25.5 Net profit 123.5 137.8 181.9 204.4 206.4 ROCE (%) 102.4 88.9 100.0 93.2 98.6 Dividend payout ratio (%) 52.3 65.7 49.8 44.3 50.1 Balance Sheet Statement FYE 31 Dec (RMm) 2016 2017 2018E 2019E 2020E Liquidity Fixed assets 140.7 151.3 161.1 168.3 172.1 Current ratio (x) 1.3 1.3 1.4 1.3 1.5 Other long term assets 14.4 5.7 7.3 8.9 9.6 Op. cash flow (RMm) 81.2 55.0 92.4 206.1 304.9 Total non-current assets 155.1 157.1 168.4 177.3 181.6 Free cashflow (RMm) 64.2 6.5 42.4 156.1 256.9 FCF/share (sen) 5.0 0.5 3.3 12.1 19.9 Cash and equivalents 465.8 487.2 497.1 552.3 708.0 Stocks 24.0 24.4 34.8 34.7 35.7 Asset management Debtors 906.5 1,155.4 1,213.2 1,730.8 1,248.5 Debtors turnover (days) 185.0 203.1 174.1 211.6 150.9 Other current assets 46.0 61.8 61.8 61.8 61.8 Stock turnover (days) 4.9 4.3 5.0 4.2 4.3 Total current assets 1,442.2 1,728.9 1,806.9 2,379.6 2,053.9 Creditors turnover (days) 141.5 208.2 160.1 193.7 138.7 Creditors 693.3 1,184.3 1,115.2 1,584.1 1,147.5 Capital structure Short term borrow ings 136.5 134.7 107.7 86.2 68.9 Net gearing (%) (66.8) (63.7) (60.4) (61.4) (74.1) Other current liabilities 273.1 5.6 99.5 119.7 149.1 Interest cover (x) NA NA NA NA NA Total current liabilities 1,102.9 1,324.6 1,322.4 1,790.0 1,365.6 Long term borrow ings 0.0 0.0 0.0 0.0 0.0 Quarterly Profit & Loss Other long term liabilities 0.6 6.5 6.5 6.5 6.5 FYE 31 Dec (RMm) 4Q16 1Q17 2Q17 3Q17 4Q17 Total long term liabilities 0.6 6.5 6.5 6.5 6.5 Revenue 553.1 419.5 417.2 491.4 748.2 Shareholders' Funds 493.0 553.7 645.1 759.0 861.9 Operating expenses (515.9) (368.8) (372.3) (437.5) (700.6) Minority interests 0.8 1.1 1.3 1.4 1.5 EBITDA 37.3 50.7 44.9 53.9 47.6 Depreciation (9.6) (9.1) (9.1) (9.7) (9.8) Cash Flow Statement EBIT 27.7 41.6 35.8 44.2 37.8 FYE 31 Dec (RMm) 2016 2017 2018E 2019E 2020E Net int income/(expense) 0.6 2.1 1.0 0.7 3.6 EBIT 145.1 162.2 228.4 255.8 254.2 Associates' contribution 0.0 0.0 0.0 0.0 2.2 Depreciation & amortisation 39.1 37.8 40.3 42.8 45.2 Forex gain/(loss) 0.3 0.7 0.1 0.0 (0.7) Working capital changes (58.7) (112.1) (137.3) (48.5) 44.8 Exceptional items 9.1 (0.2) 5.8 (1.8) 1.4 Cash tax paid (26.5) (37.1) (57.5) (64.6) (65.2) Pretax profit 37.6 44.2 42.8 43.1 44.2 Others (17.8) 4.2 18.5 20.7 26.0 Tax (5.7) (9.5) (6.1) (8.6) (12.0) Cashflow from operation 81.2 55.0 92.4 206.1 304.9 Minority interest 0.1 0.0 0.1 0.1 (0.3) Capex (17.0) (48.4) (50.0) (50.0) (48.0) Net profit 32.1 34.7 36.8 34.6 31.8 Disposal/(purchases) 89.6 82.9 0.0 0.0 2.0 Core net profit 22.7 34.2 30.8 36.4 31.1 Others 0.0 0.0 0.0 0.0 0.0 Cash flow from investing 72.7 34.5 (50.0) (50.0) (46.0) Margins (%) Debt raised/(repaid) (0.3) (1.9) (26.9) (21.5) (17.2) EBITDA 6.7 12.1 10.8 11.0 6.4 Equity raised/(repaid) 0.0 0.0 0.0 0.0 1.0 PBT 6.8 10.5 10.3 8.8 5.9 Net interest income/(exp) 4.4 7.4 9.0 11.2 15.4 Net profit 5.8 8.3 8.8 7.0 4.3 Dividends paid (84.0) (71.1) (90.5) (90.5) (103.4) Others (0.3) (2.9) 0.0 0.0 1.0 Cash flow from financing (80.3) (68.4) (108.5) (100.9) (103.2) Free Cash Flow 64.2 6.5 42.4 156.1 256.9 Page 5 of 6
Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2142 3700 F : + 603 2146 7630 research@affinhwang.com Page 6 of 6