Sunway Construction- Brace for full MCO impacts

Date: 22/05/2020

Source  :  BIMB
Stock  :  SUNCON       Price Target  :  1.67      |      Price Call  :  SELL
        Last Price  :  1.92      |      Upside/Downside  :  -0.25 (13.02%)

  • Overview. SunCon’s 1Q20 core net profit fell 52.1% yoy on the back of lower revenue by 16.9%. Construction segment dropped 19% yoy, however this was cushioned by higher contribution from precast segment that was higher by 9.9% yoy. On qoq basis, revenue fell 24.7% due to reason mentioned above, as such core net profit fell by larger quantum of 48.3%.
  • Key highlights. Suncon’s 1Q20 weak performance was largely impacted by construction segment. The impact of movement control order (MCO) for 2 weeks starting 18 March 2020 witnessed lower progress billing for the division.
  • Against estimates: Below. Suncon 3MFY20 core net profit of RM17.5m came in behind both our and consensus’ forecast at 13% and 11% respectively. The key setback was mainly from lower construction contribution amid the 2 weeks impact of MCO, resulting in lower billing progress from clients and lower margin from higher opex.
  • Outlook. After incorporating new awards announced of RM121m, SunCon latest outstanding orderbook stands at c.RM5.6bn, this translates into a healthy level of 3.5x cover of FY19 revenue. Management is maintaining its RM2bn target worth of jobs in FY20 excluding potential contracts, which include the upcoming ECRL tenders, Penang Transport (PTMP) as well as internal awards. Nevertheless, we are less optimistic on the progress billing and jobs due to the absence of physical work on site for six weeks since midMarch. We lower our replenishment target of RM1.5-RM2bn for FY20 while adjusting for some timing delays and lower margin assumptions. As such, we lower our FY20 and FY21 earnings assumption by 37% and 24% respectively. We also take this opportunity to introduce FY22 assumption.
  • Given lower than expected 1Q20, we adjusted SunCon’s TP to RM1.67 (from RM1.80 previously) based on SOP valuations, tagged to 15x PE. All in, we reckon SunCon will continue to be backed by its parent co and this could provide continuous earnings visibility to the group. Nevertheless, we foresee weak quarter ahead due to the full impact of MCO that will pressure margins as well as lower billing progress from outstanding projects. Downgrade to SELL rating (from Hold).

Source: BIMB Securities Research - 22 May 2020

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