sunway initiating coverage 20100521 osk

8/9/2019 Sunway Initiating Coverage 20100521 OSK

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PP10551/10/2010(025682)21 May 2010

OSK Research | See important disclosures at the end of this report 1

MALAYSIA EQUITYInvestment Research

Daily News

Initiating CoverageJeremy Goh, CFA+60 (3) 9207 7600

[email protected] Sunway Holdings

Ripe for the Picking

BUY

Target RM1.96Previous -Price RM1.43

CONSTRUCTION

Sunway is primarily involved in construction,property development and quarrying.

Stock Statistics

Bloomberg Ticker SGW MKShare Capital (m) 601.76

Market Cap (RMm) 860.5252 week HL Price (RM) 1.73 0.903mth Avg Vol (000) 1,160.8YTD Returns 12.6Beta (x) 1.49

Major Shareholders (%)

Tan Sri Jeffery Cheah 43.0

Share Performance (%)

Month Absolute Relative1m -5.1 -4.23m 5.1 -0.86m 6.7 4.312m 56.3 25.0

6-month Share Price Performance

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

Oct-09 Nov-09 Jan-10 Feb-10 Mar-10 Apr-10

We have a positive outlook on the domestic construction scene and view Sunway as

strong proxy. Its established track record should give Sunway the clout to secure

repeat jobs from existing clients. We also expect more jobs to flow from overseas

markets such as Abu Dhabi, India and Singapore. Sunways property earnings

hould be anchored by its Singapore developments, for which there has been strong

ake-up. We initiate coverage on Sunway with a BUY rating and RM1.96 TP.

Domestic outlook. Sunway has tendered for RM16.1bn worth of jobs and boasts a

historical success rate of 10%-15%. We believe that domestic contracts awarded to listed

contractors in 2010 may exceed last years RM10bn. Some 77% of Sunways targeted jobs

are in Malaysia. Among the potential jobs are: (i) the LCCT building (RM750m-RM850m)and satellite terminal (RM400m-RM500m), for which Sunway has been prequalified, and (ii)

Legoland Theme Park (RM700m), given its experience with 2 theme parks earlier.

Repeat jobs. We understand that Putrajaya Holdings SB intends to call for RM1bn worth of

tenders in the coming months and SunCity has RM700m-RM800m worth of projects in the

pipeline. In our view, Sunway should have a good chance of success with these developers

as it has previously conducted works worth RM750m-RM780m for each of the two.

Foreign contracts. Currently Sunway is constructing Phase 1 of the USD25bn Arzanah

Development. As tenders for Phase 2 (RM1bn) could be called next year, we expect

Sunway to leverage on its relationship with Capitala to secure a slice of the pie. In India, we

see Sunway securing some road jobs given the sizable rollouts being planned, a shortage

of local capacity and the companys track record (RM1bn completed). We also believe

Sunway can land more precast concrete structure jobs in Singapore, driven by the nationsplans to ramp up construction of HDB flats.

Property developments. Sunway has an effective GDV balance of RM1.9bn, out of which

RM750m-RM800m will be launched this year. We see property earnings anchored by the

Boon Keng (SGD421m) and Toa Payoh (SGD680m) developments, in which it has a 30%

stake. Both developments are nearly sold out and construction has commenced. Sunway

also plans to launch its Jln Senang development (SGD420m, 30% stake) this year.

Initiate with BUY. We have a 3-year earnings CAGRf of 27.5%. Sunway is also disposing

of some non-core assets to achieve a net gearing target of below 50%. Large cap

contractors under our coverage are now trading at 14.7x CY10 earnings. Given its higher

net gearing, we are ascribing a lower earnings multiplier of 12x to Sunways partially diluted

FY10 EPS, from which we derive a TP of RM1.96.

FYE Dec (RMm) FY08 FY09 FY10f FY11f FY12f

Revenue 1,825.2 2,639.2 1,909.5 2,105.5 2,483.9Net Profit 100.2 109.8 120.4 138.6 151.9% chg y-o-y na 9.7 9.6 15.1 9.6Consensus - - 116.1 138.1 162.8EPS (sen) 16.6 18.3 20.0 23.0 25.2DPS (sen) 2.0 - 2.0 2.3 2.5Dividend yield (%) 1.3 - 1.3 1.5 1.7ROE (%) 18.1 16.0 14.6 14.7 14.2ROA (%) 4.9 5.1 5.1 5.5 5.7PER (x) 9.0 8.2 7.4 6.5 5.9BV/share (RM) 0.99 1.28 1.46 1.67 1.90P/BV (x) 1.5 1.2 1.0 0.9 0.8Note: FY09 is a 18mth period. Per share does not dilute for warrants (246.7m) and ESOS (24.9m)


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OSK Research


BACKGROUND

Humble beginnings. Sunway Holdings Bhds (Sunway) history goes back more than 3 decades when

it started as a humble local tin mining and quarrying company. It was listed on the Main Board of Bursa

in 1984 under the name Sungei Way Holdings. Over the years, Sunway nurtured its quarrying

business and also ventured into construction.

Crisis strikes. In the mid-90s, Sunway began to raise more debt to finance its acquisitions and

overseas expansion. The bulk of the debt came from the issuance of a USD110m Euro convertible

bond in 1996. Its fortunes turned when the 1997 Asian financial crisis struck, as the group reeled fromthe double whammy impact of slowing construction activities and piling debts. In efforts to reduce its

net gearing, Sunway embarked on various restructuring exercises such as disposing of its quarries

and recapitalising its balance sheet.

Not so silky. After the Asian financial crisis, Sunway suffered another blow in relation to its 36.2%

stake in SunInfra (now known as SILK Holdings (NR)), the toll concessionaire for the Kajang SILK

Highway. Due to lower than expected traffic numbers coupled with high interest expense, SunInfra ran

into losses which were equity accounted into Sunways bottomline. In 2008, Sunway disposed of its

entire stake in SunInfra.

Rising from the ashes. Having survived the Asian financial crisis and debacle involving SunInfra,

Sunway has emerged a stronger entity. Today, it has businesses in construction, quarrying, trading &

manufacturing, building materials and property development spanning 10 countries.

Figure 1: Sunways business activities and geographical presence

Source: Company

Figure 2: Revenue breakdown Figure 3: PBT breakdown

Construct56%

Property12%

Trading17%

Quarry9%

BuildingMaterial

6%

Source : Company

Construct48%

Property21%

Trading13%

Quarry11%

BuildingMaterial

8%

Source : Company

Management team. Sunway is spearheaded by Executive Chairman Tan Sri Dr Jeffery Cheah, who

holds a 45% stake in the company. He also holds a 40% share in property developer Sunway City

(SunCity) (NR), thus making the two entities sister companies. We understand that most of

Sunways senior management has been with the company for more than a decade.


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OSK Research


INVESTMENT THESIS

Our investment thesis on Sunway is simple: we remain positive on the outlook for domestic

construction and view Sunway as an excellent proxy. As Sunway enjoys a good reputation

among its clients, it is able to secure repeat contracts. We also expect more overseas contracts

from countries such as Abu Dhabi, India and Singapore. For its property division, we see sales

remaining strong, underpinned by the domestic economys recovery. Meanwhile, the quarries,

trading and building materials divisions should continue to show decent growth.

CONSTRUCTION DIVISION

Eyes on more jobs. Sunway has an orderbook balance of ~RM2.5bn, which we estimate is good for 2

years. Historically, Sunway secured jobs from a diversified pool of clientele in the government and

private sectors locally and overseas, which help make it less dependent on jobs from a particular

segment. For example, although 2008 was a drought year for domestic contracts, Sunway managed to

secure RM2bn worth of jobs, thanks to contracts from Abu Dhabi and Singapore. Management has

guided for RM16.1bn worth of tenders in the pipeline and a historical success rate of 10%-15%. Our

projections assume RM750m in new jobs for FY10 (RM263m achieved YTD) and RM1bn pa for FY11-

12, which is still below its 5-year historical average of RM1.15bn pa.

Figure 4: Sunways annual orderbook replenishment (RM/m)

1,827

607

785

2,038

497

750

1,000 1,000

-

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 2009 2010f 2011f 2012f

Source: Bursa announcements, OSK Research

Figure 5: Sunways outstanding construction orderbook (RM/m)

Project Value Balance

2 govt buildings, Precinct 4, Putrajaya 520 333

Subcontract for South Klang Valley Expressway 199 65

Hotel and office tower, Precinct 1, Putrajaya 147 147

Pilling & substructures, Komtar, Johor Bahru 23 23

100 residential units, Shah Alam 21 21

Hotel extension, Impiana KLCC (Phase 2) 88 88

Other domestic jobs 113 113

Indian highways (UP4 and Cochin) 474 138

Supply of precast concrete, Singapore 550 398

Rihan Heights (M&E works), Abu Dhabi 326 314

Rihan Heights (Arzanah Development), Abu Dhabi ^ 941 743

Al Reem Island (Zone C&E) Phase 1, Abu Dhabi ^ 461 105

Total 3,864 2,490

Note: ^ Only reflects Sunways 60% stake in Rihan Heights and 25% stake in Al ReemSource: Company


4/13

OSK Research


Positive sector outlook. We are OVERWEIGHT on the Malaysian construction sector underpinned

by positive news flow in the coming months. Government development expenditure is expected to

remain at a record high of RM53.2bn in 2010 (RM53.6bn in 2009). In tracking the domestic

construction awards announced on Bursa, we found that the jobs flow YTD (i.e Jan-April) has

increased 5.2% y-o-y. We believe that the total contracts awarded for 2010 can easily surpass the

RM10bn achieved last year. Recently, 3 Private Finance Initiatives (PFIs)-based projects worth

>RM500m were dished out. This signals that the long awaited PFI projects are gaining traction, which

is positive for the sector as more jobs can be implemented. The unveiling of the 10MP in June should

also be positive for the construction sentiment. Sunway has positioned itself for a pick-up in domestic

construction, with RM12.4bn worth of targeted tenders in Malaysia.

Figure 6: Government development expenditure (RM/bn)

0

10

20

30

40

50

60

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010e

Source: Bank Negara Malaysia

Beneficiary of small jobs. YTD the average size of domestic contracts bagged by listed contractors is

RM155m, which implies that most jobs are mid-small sized in nature. We believe Sunway is one of the

main beneficiaries as most of its domestic jobs are worth RM110m on average.

Participating chance with LCCT. Five contractors are said to have been shortlisted for the Low Cost

Carrier Terminal (LCCT) building (RM750m-RM850m) and satellite tower (RM400m-RM500m). The

contractors are Sunway, IJM Corp (BUY, TP: RM5.45), UEM-Bina Puri JV, Gadang-PPC JV and AHT

Norlan-Carriage JV. Along with IJM, we think that Sunway has a decent participating chance in the

project. Sunway has worked with Malaysia Airports Holdings (TRADING BUY, TP: RM5.50) on various

structures at Subang Airport (RM120m). Track record aside, we believe that Sunway has the power to

make competitive bids which is a key criterion for securing jobs on open tender. For example, Sunway

made the 2nd

lowest bid for the LCCT EW1 package (RM363m).

Good track record in Putrajaya. In the past 5 years, Sunway has been awarded RM770m worth of

contracts from Putrajaya Holdings SB, the master developer for Putrajaya (Malaysias government

administration centre). The developer intends to call for RM1bn worth of tenders comprising office

towers, commercial blocks and residential units in Putrajaya in the coming months. It has said that

names like Sunway, IJM, UEM Builders, Ahmad Zaki (BUY, TP: RM1.16) and Ireka Corp (NR) would

be invited to put it their bids. We believe Sunway stands to get a slice of the pie given its vast

experience there.

Figure 7: Projects secured from Putrajaya Holdings SB in the past 5 years

Date Project RM/m

29-Sep-09 Hotel and office tower Plot PZ10, Parcel Z, Precint 1 147.4

28-Jan-08 Remaining infra works at Precint 11 109.6

26-Sep-07 Govt office building, Lot4G10, Precint 4 273.2

26-Sep-07 Govt office building, 4G11 & 4T4A, Precint 4 246.8

Contracts from Putrajaya in past 5 years 777.0

Source: Bursa announcements


5/13

OSK Research


SunCitys preferred contractor. Sunway is the preferred contractor for its sister company, SunCity, a

property developer. As preferred contractor, Sunway gets to match the lowest bidder in a tender. So

far, Sunways success rate in SunCity projects is about ~50% although the latter employs the open

tender system. Various development projects in the pipeline for SunCity are collectively worth

RM700m-RM800m, including Sunway Pyramids mall extension, a corporate tower, Sunway college

extension and some residential units. We opine that Sunway should be able to gain a share of the

construction works given its track record with SunCity. Over the last 5 years, Sunway has bagged

RM758m worth of construction works from SunCity.

Figure 8: Projects from SunCity in the past 5 years

Date Project RM/m

17-May-10 Various works for office tower & car park, Sunway 88.0

12-Feb-10 100 units of residential homes, Shah Alam 21.5

12-May-08 Various structures at Sunway South Quay 12.7

09-Oct-07 Pilling and substructure works, Kiara Hills Phase 3 42.8

05-Mar-07 Sunway Medical Centre extension 85.0

30-Dec-05 Shopping complex at Seberang Perai Tengah 90.3

19-Sep-05 Several campus buildings for Monash University 119.2

04-Feb-05 Pyramid mall extension 298.7

Contracts from SunCity in past 5 years 758.2


Legoland job up for grabs. In March, Iskandar Malaysias developer Iskandar Investment called fortenders for the construction of Legoland Malaysia Theme Park (RM700m). The 2 packages being open

for tender comprise (i) primary infra, and (ii) service & admin building, car parks and substation. We

see Sunway possibly winning some packages involving the theme park construction. Sunway had

previously constructed the Sunway Lagoon Theme Park and the Lost World of Tambun.

More from Arzanah. Management is positive on prospects in the Middle East, particularly Abu Dhabi

given the higher margins and the emirates tax free status. In September 2008, Sunway together with

Abu Dhabi-based Silver Coast LLC were awarded the construction works for Rihan Heights worth

RM1.6bn (RM1.2bn outstanding). Sunway has a 60% stake in the job and profits will be recognized as

contributions from JV entities (equity method). Rihan Heights comprises 5 blocks of high end condos,

townhouses and a clubhouse, representing Phase 1 of the Arzanah Development. Arzanah is a joint

development between Mubadala (owned by the Abu Dhabi Govt) and CapitaLand (NEUTRAL, TP:

SGD4.32). We gather that tenders for Arzanahs Phase 2 could be called next year and believe thatSunway could potentially secure some works given its existing relationship with the developers.

Figure 9: Artist impression of the entire Arzanah Development in Abu Dhabi

Source: www.mubadala.ae

Indian road jobs. India intends to construct 53,639km of roads in 7 phases from now up to 2012

which will cost USD66bn. Some USD20bn worth of road contracts are expected to be awarded by 1H

2010. While Indias road construction target is at 20km/day, we gather that the current rate is only 50%

due to land acquisition issues. The Malaysian contractors we contacted feel that Indian contractors can

only hit 60% of the daily target due to capacity constraints. This implies that the balance 40% must be

fulfilled by foreign contractors. While margins in India are rather thin, we gather that Malaysias

Construction Industry Development Board (CIDB) is currently in negotiations with the National

Highway Authority of India (NHAI). Under the proposed framework, NHAI will allocate some of the road

projects to CIDB, which will then decide how to dish them out to Malaysian contractors.


6/13

OSK Research


Vast experience in India. We feel that Malaysian contractors such as Sunway have the advantage in

securing these Indian road jobs given their experience in the country. Sunway has completed RM976m

worth of roads in India so far, with RM138m outstanding. Sunway intends to bid for RM3bn-RM4bn

worth of jobs there.

Precast potential. The Singapore Government intends to build more than 12,000 units of Housing

Development Board (HDB) flats over the next 1 year to replenish existing inventory, which has been

sold down. We understand that it is mandatory to use precast concrete structures for HDB flats given

their efficiency (less labour intensive). We gather that some SGD700m (~RM1.6bn) worth of precastconcrete will be needed to fulfill Singapores HDB flat construction target. Sunway is a key beneficiary

from this as it has a plant in Tampines with a capacity of 350-400m3/ day (equivalent to ~SGD100m pa

in value). Currently, Sunway has a contract to supply precast concrete worth RM550m (72%

outstanding) to various HDB developments.

PROPERTY DIVISION

Targeting more launches. Sunways property developments have an outstanding GDV of RM1.9bn

based on its effective stake. All its local developments are located in the Klang Valley. We expect

domestic property sales to remain strong this year, underpinned by a recovering domestic economy.

OSK-DMGs economics team projects Malaysias GDP to grow by 7% in 2010. Management said it

expects to launch RM750m-RM800m worth of developments this year.

Figure 10: Sunways property developments (RM/m)

Development Type GDV Stake Share

Bangi Commercial 151 100% 151

Jalan Senang, Singapore Residential 1,080 30% 324

Sungai Long Residential 553 80% 442

Melawati 2 Residential 48 100% 48

Mont Putra Mixed 156 100% 156

Jiangyin, China Mixed 473 26% 123

Templer's Park Residential 500 60% 300

Puncak Jalil Residential 120 65% 78

Taman Equine Residential 250 100% 250

Total 3,331 1,872

Source: Company

Figure 11: Units of houses launched, soldand sales rate in the Klang Valley

Figure 12: Malaysias quarterly GDP growth

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Launched Sold

Sales rate

Source : Jones Lang Wootton

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Q

106

Q

206

Q

306

Q

406

Q

107

Q

207

Q

307

Q

407

Q

108

Q

208

Q

308

Q

408

Q

109

Q

209

Q

309

Q

409

Q

110

Q

210

Q

310

Q

410

Source : Bank Negara Malaysia, OSK-DMG estimates

Strong sales under DBSS. Sunways exposure to the Singapore property market is via its 30% stake

(70% by Hoi Hup Group) in two Design-Build-Sell Schemes (DBSS), namely the City View @ Boon

Keng and The Peak @ Toa Payoh. Both developments are public sector housing comprising HDB

flats. We expect strong earnings from these 2 developments over the next 2 years, with profits equity

accounted for under associate contributions. Sunways portion of the unbilled sales for both

developments now stands at RM543m. City View has a GDV of SGD421m and has been fully sold,


7/13

OSK Research


with construction progress now hitting 80%. On the other hand, The Peaks GDV stands at SGD680m

and is 90% sold. Its construction has reached 20% and momentum should further pick up in the

coming months.

Singapore private housing venture. Given its success with the first two public housing

developments, Sunway (together with Hoi Hup Group) have decided to venture into Singapores

private housing market. Earlier this year, it acquired 4.75 acres of land in Jalan Senang, which will be

developed into 8 blocks of 12-storey apartments comprising 500 units in total. The estimated GDV is

SGD420m and Sunway intends to launch the entire portion this year. Management has guided for the

developments profit margins to come in at 15% (at PBT level). We estimate that the bulk of theearnings recognition for this development will take place in FY11-12.

QUARRY DIVISION

Domestic operations. Sunway re-entered the quarry business in 2005 with 3 quarries. Today, it has 7

quarries and 7 asphaltic plants across Peninsular Malaysia. The quarry plants are used to crush the

rocks from its quarries into aggregates which are then either sold directly or sent to the asphalt plants

to be processed into asphaltic premix. We understand that prices of inch aggregates in Malaysia

have been on the uptrend and currently stand at RM25/tonne. Utilisation rates for Sunways quarry

plants now stand at ~60%, suggesting that there is upside potential once demand picks up fuelled by

stronger construction activities. Within the Klang Valley, Sunway has a 10% share of the market for

aggregates and 20% for asphaltic premix.

Figure 13: Details of Sunways quarryplants

Figure 14: Prices of inch aggregates inthe Klang Valley (RM/tonne)

Location Production Capacity Reserve

(MT/ month) (MT/m)

K.Kangsar 35,000 70,000 21

Rawang 60,000 100,000 8

Cheras 30,000 70,000 96

Kajang 150,000 200,000 27

Paka 35,000 60,000 25

Malacca 50,000 100,000 8

Taiping 40,000 70,000 21

Total 400,000 670,000 206

Source : Company

24

15

19

22

25

-

5

10

15

20

25

30

1996 2007 Jan-08 Jul-08 Jan-10

Source : Company

Foreign operations. Sunway also operates 2 quarries in Hanoi and Ho Chi Minh City, Vietnam with a

monthly production of 140,000 tonnes and capacity of 210,000. The aggregates from these quarries

are mainly used to produce ready-mixed concrete. In 2008, Sunway secured a contract for the annual

supply of 1m tonnes of aggregates for 5 + 5 (optional) years to the government of the Republic of

Trinidad and Tobago. Since it commenced operations in mid-2008, only 0.5m tonnes have been

delivered, implying that > 1m pa must be fulfilled in the coming years. Selling prices in the republic are

at RM54/ tonne, which is about 2x the price in Malaysia.

TRADING DIVISION

Sunways trading division comprises the following sub segments:

Hoses & fittings: This sub segment is the main contributor to the trading division. Its

hydraulic hoses are sold under its own brand, SunFlex. In Singapore, SunFlex has a 50%

market share for hose replacement, particularly in the O&G and marine sector.

Heavy equipment parts: Products include undercarriages, undercarriage frames and engine

parts under the brands SunTrak and FP Diesel.

Heavy equipment: Mainly equipment for construction and industrial uses (e.g crawler drills,

concrete pump, wheel loaders, crushers and generator sets).


8/13

OSK Research


Figure 15: Products under Sunways trading division

Source: Company

BUILDING MATERIALS DIVISION

Small but steady. The building material division is Sunways smallest. We expect contributions from

this division to be about 5%-6% of group revenue. The sub segments in this division comprise:

Pipes: Sunway has a 45% share in the domestic pipes market. It currently has an annual

production of 41,000 tonnes and is targeting to achieve 52,000 tonnes. The pipes sub

segment contributes 50% to the entire building materials division.

Pavers: This product is commonly used along pedestrian walkways. Sunway has an annual

production of 1.8m m2 with a target of 2.4m m2 and has been increasing its market share in

China, Australia and Brunei. Pavers make up 40% of the building materials division.

Wall panels: Mainly sold in Malaysia and Singapore. Contributes 10% to building materials.

Figure 16: The various products under Sunways building materials division

Source: Company


9/13

OSK Research


FINANCIAL HIGHLIGHTS

Let bygones be bygones. We wont deny it, but Sunways earnings track record has been rather

bumpy. Losses in FY02 were mainly due to impairment of various items amounting to RM143m. After

2 decent years of profits from FY03-04, Sunway was again in the red from FY06-07 as a result of

losses from then associate SunInfra (36.2% stake). In 2008, Sunway disposed off its stake in SunInfra

and has started clean since. Moving forward, earnings growth for FY10-12 will be underpinned by the

construction and property divisions. We also expect bigger contributions from its associates & JV

entities mainly arising from works at Arzanah and its Singapore property ventures. All in all, we

forecast a 3-year earnings CAGRf of 27.5%. The upside to our estimates could potentially be driven bystronger than expected contracts flow, better property take-up rates and higher margins.

Figure 17: Earnings track record of Sunway (RM/m)

(187)

74

39

(12) (9)

100110

120139

152

(200)

(150)

(100)

(50)

-

50

100

150

200

FY02 FY03 FY04 FY06 FY07 FY08 FY09 FY10f FY11f FY12f

Note: FY06 and FY09 are a 18 month period due to change in financial year.Source: Company, OSK Research

Trimming its net gearing. Sunways net gearing has come off substantially from 269% in FY02 to

63% currently. In efforts to further cut its net gearing, Sunway has begun divesting its non-core assets

such as Plaza Masalam (RM74m) and Sunway Hanoi Hotel (RM59m). The company has identified

another RM120m worth of such assets that will be progressively sold. These include Wisma Mas

(RM40m) and some portions of the Subang Square (RM36m). Conversion of its outstanding warrants(~246m @ RM1.30 exercise price) would raise another RM320m in cash. Sunway is targeting to

achieve a net gearing ratio of below 50% (currently 63%). Without factoring in the asset sales and

warrants conversion, Sunway should hit this target in FY11 mainly from cash collections from its

construction and property developments.

Figure 18: Net gearing trend for Sunway (%)

269

136

8594

11295

6356

47 40

-

50

100

150

200

250

300

FY02 FY03 FY04 FY06 FY07 FY08 FY09 FY10f FY11f FY12f

Source: Company, OSK Research


10/13

OSK Research


VALUATION & RECOMMENDATION

Initiate with BUY, RM1.96 TP. Large cap contractors (market cap > RM1.5bn) within our coverage are

currently trading at 14.7x CY10 earnings. Given Sunways higher net gearing, we are ascribing a lower

earnings multiplier of 12x its FY10 EPS, which translates into a 17.2% discount to its peers. As

Sunway has a sizable number of warrants and ESOS relative to its current share base, we have made

the assumption that that 50% of these were converted, to arrive at our EPS (i.e partial dilution). We

initiate coverage on Sunway with a BUY rating and RM1.96 TP.

Figure 19: PER multipliers (x) of Sunways peers based on CY10 earnings

17.5 17.5

13.8

9.9

7.4

0

2

4

6

8

10

12

14

16

18

20

IJM Corp Gamuda WCT Mudajaya Sunway

Note: Sunways PER has not been diluted for warrants and ESOSSource: Bloomberg, OSK Research


11/13

OSK Research


APPENDIX: Construction contracts secured by Sunway since 2005

Date Project RM/m Client

17-May-10 Subcontract for stones & tilling, Arzanah Development 65.7 Silver Coast - Sunway Innopave

17-May-10 Various works for office tower & carpark, Sunway 88.0 Sunway City

01-Apr-10 Hotel extension, Impiana KLCC (Phase 2) 88.0 Heritage Land SB

12-Feb-10 100 units of residential homes, Shah Alam 21.5 Sunway City

04-Dec-09 Pilling & substructure, Jln Tun Abdul Razak, Johor 23.4 D'sara Assets SB

29-Sep-09 Hotel and office tower Plot PZ10, Parcel Z, Precint 1 147.4 Putrajaya Holdings

26-May-09 MEP works for Arzanah Dev - Rihan Heights (Phase 1) 326.0 Silver Coast - Sunway Innopave

06-Nov-08 Precast concrete supply contract in Singapore 408.1 Straits Construction Co

23-Sep-08 Arzanah Development - Rihan Heights (Phase 1) 1,080.0 Capitala

16-Jul-08 Pilling & earthworks for mixed development, Mont Kiara 28.6 Aston Star SB

14-May-08 Various structures at MIAC, Subang Airport 119.8 MAHB

12-May-08 Various structures at Sunway South Quay 12.7 Sunway City

21-Apr-08 Substructure for building at Jln Tun Razak 15.6 Delta Heights SB

21-Feb-08 Subcontract for South Klang Valley Expressway 263.6 MEB Construction

28-Jan-08 Remaining infra works at Precinct 11 109.6 Putrajaya Holdings

09-Oct-07 Pilling and substructure works, Kiara Hills Phase 3 42.8 Sunway City

26-Sep-07 Govt office building, 4G11 & 4T4A, Precinct 4 246.8 Putrajaya Holdings

26-Sep-07 Govt office building, Lot4G10, Precinct 4 273.2 Putrajaya Holdings

23-May-07 Highway connectivity to ICTT at Vallarpadam, Cochin 137.3 NHAI05-Mar-07 Sunway Medical Centre extension 85.0 Sunway City

08-Oct-06 Zone C, Phase 1, Plot 1, Al Reem Island 330.0 Tamouh Invetments

27-Jul-06 Pilling & substructural works for condo in BU 26.9 Bandar Utama Dev

27-Jul-06 Blocks A1-A4 for Solaris Dutamas 40.4 Aston Star SB

28-Jun-06 Basement B1-B7 for Solaris 2 154.9 Aston Star SB

17-Jan-06 Distribution warehouse, Bukit Jelutong 54.9 Zuellig Pharma SB

30-Dec-05 Shopping complex at Seberang Perai Tengah 90.3 Sunway City

19-Sep-05 Several campus buildings for Monash University 119.2 Sunway City

05-Jul-05 NH76 (km406-449.15), Rajasthan 284.2 NHAI

05-Jul-05 NH25 (km104-170), Uttar Pradesh 411.3 NHAI

20-May-05 Subcontract for UiTM new campus 181.0 Haluan Prisma SB

13-May-05 Subcontract for Maju Expressway 165.0 Maju Holdings

05-May-05 Ministry of Legal Affairs Tower, Trinadad & Tobago 220.8 Urban Dev Corp

30-Mar-05 18 story apartment at Jln Tun Razak 56.7 Nirwana Indah SB

04-Feb-05 Pyramid mall extension 298.7 Sunway City



12/13

OSK Research


EARNINGS FORECAST

FYE Dec (RMm) FY08 FY09^ FY10f FY11f FY12f

Turnover 1,825.2 2,639.2 1,909.5 2,105.5 2,483.9EBITDA 191.0 201.1 167.4 214.2 266.6PBT 128.5 153.2 159.7 187.7 209.1Net Profit 100.2 109.8 120.4 138.6 151.9EPS (sen) 16.6 18.3 20.0 23.0 25.2DPS (sen) 2.0 - 2.0 2.3 2.5

MarginEBITDA (%) 10.5 7.6 8.8 10.2 10.7PBT (%) 7.0 5.8 8.4 8.9 8.4Net Profit (%) 5.5 4.2 6.3 6.6 6.1ROE (%) 18.1 16.0 14.6 14.7 14.2ROA (%) 4.9 5.1 5.1 5.5 5.6Balance SheetFixed Assets 722.7 956.9 1,004.3 1,051.1 1,091.7Current Assets 1,299.6 1,349.9 1,411.6 1,529.3 1,742.2Total Assets 2,022.3 2,306.9 2,415.9 2,580.4 2,833.9Current Liabi lit ies 906.4 1,018.1 1,059.8 1,136.6 1,286.8Net Current Assets 393.2 331.9 351.8 392.6 455.3LT Liabilities 470.8 429.6 388.5 351.4 318.1Shareholders Funds 645.2 859.2 967.6 1,092.3 1,229.0

Net Gearing (%) 95.1 63.4 56.3 46.7 40.2Note: FY09^ is an 18-month period due to change in financial year from June to Dec. Per share datahas not been diluted for warrants(246.7m) and ESOS (24.9m)


13/13

OSK Research


OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressedwill be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities orfinancial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investmentdecision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interestand/or underwriting commitments in the securities mentioned.

Distribution in Singapore

This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to Institutional Investors, Expert Investors orAccredited Investors as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an Institutional Investor, Expert Investoror Accredited Investor, this research report is not intended for you and you should disregard this research report in its entirety. In respect of anymatters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd(DMG).

All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research.Published and printed by :-

OSK RESEARCH SDN. BHD. (206591-V)(A wholly-owned subsidiary of OSK Investment Bank Berhad)

Chris Eng

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