Sunway Construction Group - Commendable Performance

Date: 19/08/2020

Source  :  HLG
Stock  :  SUNCON       Price Target  :  2.17      |      Price Call  :  BUY
        Last Price  :  1.92      |      Upside/Downside  :  +0.25 (13.02%)

SunCon’s 1HFY20 earnings of RM22m (-65% YoY) were slightly below our and consensus expectations. 2QFY20 core PATAMI decreased due to lower contribution from construction and precast segments as a result of the MCO. Outstanding order book of RM6.3bn translates into a healthy 3.6x cover ratio. We expect stronger earnings in 2HFY20 as work progress normalises postMCO. Cut FY20 earnings by 4% and increase FY21-22 earnings by 3-5% as we recalibrate new jobs contribution. Maintain BUY with higher TP of RM2.17 after earnings adjustment based on 15x ex-cash PE multiple.

Slightly below. SunCon reported 2QFY20 results with revenue of RM140.2m (-62% QoQ, -68% YoY) and core earnings of RM4.6m (-74% QoQ, -86% YoY). This brings 1HFY20 core earnings to RM22m, decreasing by -65% YoY. Core earnings accounted for 24% of our and consensus full year forecast which is slightly below expectations even after accounting for a post-MCO rebound in 2H.

Dividends. First interim DPS of 1.25 sen going ex. on 9 Sept-20 was declared for the quarter (1HFY19: 3.5 sen).

Deviations. The results shortfall was attributed mainly to weak progress billings at its construction and precast segment due to the 2 months of little to no activity resulting from the MCO.

YoY/QoQ. YoY and QoQ core PATAMI declined by -74% and -86% respectively due to lower construction and precast revenue pursuant to the MCO. Compounding the topline decline was negative operating leverage. Stringent worker testing also impeded resumption of works post-lifting stop work order in June. Precast dipped into losses (LBT: -RM3.5m) in 2QFY20 as closure of SG-MY border prevented order deliveries.

YTD. Core earnings declined (-65%) dragged by MCO, hampering its construction and precast activities. Subsequent to the MCO, its construction fully normalised only towards end 2QFY20 while precast was plagued by the closure of SG-MY border resulting in inability to execute orders.

Recovering operations. According to management, construction operations have largely normalised since end-June with current productivity levels little changed from pre-MCO levels. This is much quicker than earlier guidance of end 3QFY20. On the precast side, utilisation rates are hovering at c.30% (pre-MCO: 60%) as construction activities in Singapore remains subdued. We believe once construction normalises, Suncon’s precast operations should recover in tandem.

New job wins. Along with the results release, Suncon announced 2 internal job awards. They are for: i) construction of commercial mixed development in Bandar Sunway for a contract sum of RM463.2m which commenced in mid-July-2020 spanning 40 months and ii) development of 3 blocks of service apartments at Jalan Belfield, KL for a contract sum of RM402.8m lasting 44 months. Collectively, this uplifts outstanding orderbook by c.16%.

Delayed but intact guidance. SunCon’s latest outstanding orderbook stands at c.RM6.3bn, translating into a healthy level of 3.6x cover of FY19 revenue. Active outstanding tenderbook stands at RM8.5bn, largely overseas focused. Despite a difficult year, Suncon has so far clinched c.RM1.6bn worth of jobs, inching closer to its replenishment guidance of RM2bn. We believe this is achievable given its growing tenderbook (against RM7.3bn as at 1QFY20) inflated by new tenders in India and Philippines.

Forecast. Cut FY20 earnings by 4.1% after delaying earnings recognition from new job wins. Increase FY21-22 earnings by 2.7% and 4.7% respectively after factoring in delayed recognition.

Maintain BUY, TP: RM2.17. Maintain BUY with higher TP of RM2.17 after earnings forecast adjustment. TP is derived by pegging FY21 EPS to 15x ex-cash P/E. We believe given its impressive execution track record, Suncon is well positioned to partake in pump priming initiatives. Its healthy balance sheet with net cash position of RM0.30/share and strong support from parent-co Sunway Bhd should provide some degree of resiliency during these trying times.

Source: Hong Leong Investment Bank Research - 19 Aug 2020

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