Sunway Construction Group - Washout 2020 But Watch for Record 2021

Date: 22/05/2020

Source  :  KENANGA
Stock  :  SUNCON       Price Target  :  2.45      |      Price Call  :  BUY
        Last Price  :  1.92      |      Upside/Downside  :  +0.53 (27.60%)

1QFY20 disappointed due to slower-than-expected work progress on the back of running fixed costs during the MCO period. While we cut FY20E core net profit down 43% by deferring revenue recognition, we remain undeterred by the weak results and upgrade SUNCON to OUTPERFORM with a higher TP of RM2.45 as we anticipate an impending sector rerating once the government pivots their focus onto construction to lead an economic recovery.

Under-estimated the impact of MCO. 1QFY20 earnings of RM16.4m came in below at 13%/12% of our/consensus’ estimate due to our overly aggressive billings assumption during the MCO period.

Dragged by operating leverage. With running fixed costs on the back of a sharp decrease in revenue of 25% QoQ and 17% YoY, 1QFY20 earnings decreased by 55% QoQ and 41% YoY.

Inching towards RM2b target. Along with its results, SUNCON announced a new contract worth RM121m from its parent SUNWAY to build an international school in Subang. With RM688m wins YTD, we are reassured that our/management’s FY20E target replenishment of RM2b is intact, underpinned by its RM7.3b tender-book.

Slash FY20E earnings by 43% to RM70m after deferring revenue recognition for ongoing projects. We anticipate SUNCON to slip into losses in 2Q20 as the MCO period is slightly >2x 1Q20. In line with the revenue deferment, FY21E earnings is raised by 3% to potentially record an all-time high backed by an orderbook of RM5.4b.

Market to focus less on weak results and more on stimulus. With the number of daily Covid cases normalizing at low double digits, we believe the Malaysian government will gradually pivot their focus onto economic recovery measures. Accordingly, so will the market. We are convinced that construction will be a key lever for the government to kick start the recovery through implementing mega projects and SUNCON would be a direct beneficiary given their robust track record. We believe an apt time to anticipate a rally in the construction space would be from late August - November 2020 when the worst results season (ie 2QCY20 results season) for contractors would then be flushed out; while the anticipation of mega projects for budget 2021 intensifies. That said, we still advocate dollar cost averaging as it is never easy to ‘time’ the market.

Look past 2020 and bet on 2021. With construction works resuming and earnings visibility reverting to normalcy beginning May, we switch our valuation method back to SoP (from PBV) and roll valuation base year forward to FY21. Coupled with our expectations that market interest will gradually gravitate towards the construction sector from now till Budget 2021, we upgrade SUNCON to OUTPERFORM with a higher TP of RM2.45 (from RM1.80; MP). Our SoP-based TP is derived from a construction PE of 18x (+1SD from its 5-year mean).

Risks include: Snap GE due to a successful vote of no confidence by Tun Mahathir in July 2020, and a resurgence of Covid cases.

Source: Kenanga Research - 22 May 2020

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