This article first appeared in The Edge Financial Daily, on March 29, 2016.

Sunway Construction Group Bhd 
(March 28, RM1.67)
Initiates buy with a target price (TP) of RM1.92: Sunway Construction Group Bhd is the largest listed pure-play construction player in Malaysia. 

Given a strong track record with its mass rapid transit (MRT), light rail transit (LRT) and bus rapid transit (BRT) jobs previously, we are of the view that the group is on a strong footing to bag several key infrastructure packages such as the MRT2, LRT3 and BRT, as well as other major highway projects like the Sungai Besi-Ulu Kelang Elevated Expressway or Suke, the Duta-Ulu Kelang Expressway or Duke and the Pan-Borneo Highway. 

The group has also established itself as the only construction specialist to be involved in all three Rapid line infra projects (MRT, LRT and BRT). This makes the group one of the strongest contenders to win a pipeline of 11th Malaysia Plan projects. 

Riding on Singapore’s public housing development, its precast division is a strong proxy for the growing demand for Housing and Development Board (HDB) residences in the city state where the government is targeting to build an additional 88,000 units of public housing in financial year 2016 (FY16) to FY19. 

With premium earnings before interest and tax margins recorded over the past few years, the business is return on equity-(ROE) enhancing and also synergistic to its construction business. 

The completion of its third precast plant in Iskandar, Johor, should give it ample capacity to cater for more orders and help to boost its earnings growth going forward. 

Our TP is based on sum-of-parts (SOP) valuation to reflect the growing contribution from its high-margin precast business. 

While our SOP value is RM2.77 billion or RM2.14 per share, we have ascribed a 10% discount to arrive at our TP of RM1.92. 

At RM1.92, the group will trade at FY16 and FY17 forecast price-earnings of 17.3 times and 15.4 times respectively, which we believe is fair given the high ROEs of 27% to 29%, a strong balance sheet which is in a net cash position, an impeccable execution track record and a synergistic precast business. — AllianceDBS Research, March 28