SUNWAY CONSTRUCTION GROUP BHD’S (SunCon) listing on the Main Market on July 28 will see the unit emerge from the shadow of its conglomerate parent Sunway Bhd. The construction arm had stayed out of the limelight since its delisting in 2004 and the subsequent merger between Sunway Holdings Bhd and Sunway City Bhd to create Sunway in 2011.
“Sunway’s two main businesses are property and construction. When investors look at the construction sector — and I speak on behalf of the construction sector where our turnover is sizeable at over RM2 billion — they don’t look at us. When they mention big construction players or listed counters, they don’t think of Sunway because it is a conglomerate,” SunCon senior managing director Kwan Foh Kwai tells The Edge.
“If you look at total turnover for the past five years, we have been at the top of the industry. We beat some of the biggest players in the industry but nobody mentions SunCon. Maybe we have a bit of an image problem,” he says dryly.
That may be true because despite being one of the group’s biggest revenue and profit contributors, SunCon has gone unnoticed. In the financial year ended Dec 31, 2014 (FY2014), the builder’s turnover stood at RM1.89 billion or over 41% of Sunway’s total revenue of RM4.56 billion. It contributed RM113.82 million or 15.5% to the group’s total net profit for the year.
“I think it is the right time to come back to the market, so investors can have that choice [of investing in SunCon]. If they want to look at big construction players, they should look at SunCon. I think we are big enough,” Kwan comments.
SunCon is a fully integrated construction company with an order book of RM2.76 billion as at March 31, which ensures earnings visibility for the next two years.
Currently, it is busy with infrastructure projects, such as the Klang Valley MRT Package V4, LRT Kelana Jaya line extension, BRT Sunway Line and Coastal Highway Southern Link, which are collectively worth RM858 million. It is also building the KLCC North East car park and internal projects like Sunway Velocity Mall, the Sunway University’s new academic block and Sunway Medical Phase 3.
More importantly, SunCon is not complacent about what it has in hand. It is watching the market for more jobs — to “get as much as possible at the right time” so that its resources, whether human capital or machinery, are fully utilised. The plan is to replenish its order book by RM2 billion on an annual basis, driven by projects in the government’s RM204 billion infrastructure spending under the 11th Malaysia Plan.
Kwan, in particular, will lead SunCon’s hunt for “bigger” and “more complicated” infrastructure projects that will allow its expertise in five core areas — civil or infrastructure construction, design and build, geotechnics, mechanical, electrical and plumbing, and pre-cast concrete — to shine, besides reducing its reliance on internal or residential projects.
What helps SunCon stand out in the highly competitive construction industry, which typically sees single-digit margins, is its ability to provide clients with total solutions, says Kwan. “The construction industry has low barriers to entry but we believe we have an advantage because we can design and build, and give total solutions, from the foundations and mechanical and electrical to pre-cast elements. It is about having a niche market to sustain the kind of margin we expect the industry to pay.”
Equally significant are SunCon’s plans to build on its previous success overseas after the listing. Kwan says the company is looking at opportunities in countries such as India, the United Arab Emirates and Asean states, where its expertise can be utilised and it can earn “reasonable margins”.
“Our game plan is to develop our expertise within the country and then export our services to countries where there is a level playing field and ease of doing business. We are considering Asean and we have high hopes for the UAE. We will continue to see what we can do on a plan basis and work in projects where we have a proven track record,” he explains.
SunCon reaped success in several large-scale projects overseas, such as the construction of Al-Reem and Rihan Heights in the UAE and seven highways in India. However, only 10% to 15% of its order book now comprises overseas projects undertaken by its pre-cast concrete segment with a plant abroad.
The pre-cast segment, which contributed 13% to SunCon’s revenue in FY2014, will also be expanding. Its third plant, in Iskandar Malaysia, Johor, will be operational by the first quarter of 2016, adding 41,400 cu m of capacity to the existing 189,600 cu m at two plants, one in Senai and the other in Singapore.
The existing plants are not operating at maximum capacity yet but Kwan says he is preparing for the future when pre-cast elements, such as the industrialised building system (IBS), which is widely used in public housing schemes in Singapore, will be introduced in Malaysia “in a big way”.
“I can see that in the medium term, pre-cast housing will take shape in Malaysia. If we can’t get skilled labour and the government has a long-term policy to reduce foreign workers or impose higher levies, IBS housing would be the best solution in terms of total life cycle cost, quality and labour intensiveness.”
In fact, Sunway has entered into a joint venture with Japan’s Daiwa House Industry Co Ltd to develop 100 pre-fabricated homes in Sunway Iskandar, Johor. SunCon is working to incorporate IBS components into the project.
All this bodes well for SunCon’s investors who can expect a minimum 35% of the company’s annual core profit as dividends post-listing. The stock has an issue price of RM1.20. Hong Leong Investment Bank Research estimates that based on its minimum dividend payout ratio of 35%, SunCon offers investors a yield of 2.6% for FY2015 and 2.5% for FY2016.
This article first appeared in The Edge Malaysia Weekly, on July 6 - 12, 2015.
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