SUNWAY Construction Group Bhd (SunCon), the country’s largest pure-play construction company, is aiming to secure one of two multi-billion ringgit construction packages at the Mass Rapid Transit 3 (MRT3) project.
According to Group Managing Director (MD) Liew Kok Wing, if SunCon manages to win the Civil Package 2, which is estimated at at least RM9-10 billion, it will be the biggest order win in its four-decade history.
“Among the five contract packages in MRT3 there will be five different winners, so each winner can only win one contract. SunCon will have some focus on Civil Package 2, but we will try to bid on Civil Package 1 as well. Overall, I think we have a good chance of winning either package,” he tells The Edge in his first interview since taking the helm from Chung Soo Kiong on April 1.
Construction of the 51 km MRT3 Circle Line project will involve five work packages including Project Management Consultancy (PMC), three construction work packages and one systems work package.
SunCon has targeted the elevated sections which include Civil Package 1 (6km elevated section plus main depot) and Civil Package 2 (27km elevated section plus 1.2km ground tunnel).
Based on contract costs extrapolated from MRT2, some analysts have estimated that Civil Packages 1 and 2 are worth approximately RM2.5 billion and RM12 billion, respectively.
The MRT3 project was recently approved by the government and the package tender for PMC was announced on April 28th. The tender for civil packages 1 and 2 is expected to be put out to tender in June or July, with both contracts expected to be awarded by the end of the year.
At the MRT Circle Line Industry Briefing on April 12, MRT Corp. CEO Datuk Mohd Zarif Hashim said the MRT3 project would be implemented using a model in which the Tier 1 civil package builders would pay the construction costs for the first would have to finance for two years.
“The only job we’re really looking at is Civil Package 2,” says Liew.
“If we assume that the winner has to fund 10% to 20% of the construction costs, that’s about RM1 to 2 billion. If you look at the balance sheets of construction companies in Malaysia, not many players like us have the financial capacity to meet these criteria. So I think SunCon is in a good position,” he says.
A review at AbsolutelyStocks shows that SunCon has net debt of RM151.4 million, with a net gearing ratio of 0.21 as of December 31 of last year.
It should be noted that the bidding consortium must own 60% of Bumiputera. Therefore, SunCon needs a joint venture (JV) partner for the MRT3 jobs.
“We need to find a strong Bumi partner, possibly a government-affiliated company. We’re still checking the options. It could also be a combination of smaller Bumi partners,” says Liew, who is also non-independent CEO of SunCon.
The 53-year-old has been Managing Director of Sunway Construction Sdn Bhd, a wholly owned entity of SunCon, since January 2020. He started his career in 1993 as a project engineer for L&M Geotechnic in Singapore before moving to Thailand as a project manager responsible for infrastructure works for a luxury residential development in Bangkok.
Liew believes the RM31 billion MRT3 is a bright spark for recovery in the construction sector and is optimistic more bidding opportunities will arise.
Alongside MRT3, Liew reveals that the Bayan Lepas Light Rail Transit (LRT) project in Penang – some 19 km long and comprising 30 stations, with an estimated construction cost of RM8.5 billion – is another mega-infrastructure project SunCon is keen to pursue would like to.
“We continue to see opportunities in the continuation of major highway and rail infrastructure projects. Based on our strong track record of building mass transit projects such as MRT1&2, LRT2&3 and BRT (Bus Rapid Transit) coupled with our solid financial position, we are well positioned to bid on both the MRT3 and Bayan Lepas LRT projects,” he says.
Visibility of earnings for three years
SunCon’s net income for the year ended December 31, 2021 (FY2021) increased 55% to RM112.58 million from RM72.78 million in the prior year. The stronger result was attributed to the country’s vaccination campaign last year, which allowed economic activity to resume more quickly.
Liew highlights that SunCon had exceeded its order book replenishment target for the past three years and its outstanding order book was RM4.8 billion as of December 31 last year (see pie chart). These projects will keep the group busy for the next three years.
Meanwhile, SunCon’s bidding book was RM4 billion as of December 31 last year as the group aims to achieve a minimum annual order book replenishment of RM2-3 billion.
“Our backlog of RM4.8 billion provides us with strong earnings visibility over the next three years. Domestically, we will continue to focus on internal projects launched by our parent company, Sunway Bhd,” he notes.
SunCon is 54.56% controlled by Sunway, the publicly traded conglomerate owned by Tan Sri Dr. Jeffrey Cheah Fook Ling is controlled. The prominent tycoon also owns a 10.7% stake in SunCon, held directly and through his investment vehicle Sungei Way Corp Sdn Bhd.
According to SunCon’s 2021 Annual Report, other top outside shareholders as of April 1 included the Employees Provident Fund Board (9.18%), Amanah Saham (6.4%) and Great Eastern (3.2%).
Sunway Group’s land bank currently stands at 3,334 acres with a potential gross development value of over RM59 billion, Liew says.
“These future developments directly add to our strength in building hotels, medical centers, residential complexes and mixed commercial developments and bode well to fuel SunCon’s growth,” he adds.
With the full reopening of the economy and the easing of border restrictions, many industries, including construction, are facing acute labor shortage problems.
According to Liew, the proportion of foreign workers at SunCon has fallen from 41% in 2018 to 25% now. As of April 27, the group employed about 330 directly employed foreign workers, mostly from Indonesia.
As it will take time to fully address the labor shortage to meet business needs, he believes the labor shortage is likely to continue to weigh on the industry.
“One of the efforts we make is to manage the schedule of our projects with our customers and business partners, and to award contracts in smaller chunks to allow our business partners to plan the work schedule in detail and allocate resources accordingly,” he notes.
Succession planning in the focus of the new boss
Regarding his new role, Liew says one of his areas of focus is succession planning.
“We make a conscious effort to develop the next generation of leaders at SunCon and are hiring new members to ensure leadership continuity within the key management team and bring a fresh perspective to the organization,” he says.
Year-to-date, shares in main market-listed SunCon are up about 6%, closing at RM1.62 last Wednesday, giving it a market capitalization of RM2.08 billion. The meter is currently trading at a historical price-to-earnings ratio of 18.
In a May 9 report, Kenanga Research analyst Lum Joe Shen reiterated his “market performance” statement for SunCon, with a price target unchanged at RM1.52.
He believes that current high steel prices of RM3,400 per tonne and cement prices of RM350 per tonne will squeeze SunCon’s margins on ongoing construction projects, particularly in its precast business.
“Despite the challenges, SunCon still leads to an EBIT of 5% to 8% [earnings before interest and tax] Margins for fiscal 2022. Margin erosion from high construction material costs and labor shortages is complemented by upward margin adjustments for contracts closing this year, as SunCon has been cautious with margin detection for ongoing projects throughout,” Lum writes.