Sunway Construction Group - 1HFY20 Deemed Within Expectations

Date: 19/08/2020

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

2QFY20 CNP of RM4.6m brought 1H20 CNP to RM22.1m – broadly within our estimate (32%) but below consensus’ (25%). With this worst set of quarterly results finally out of the way coupled with the construction space going unnoticed as we approach key re-rating events (i.e. Budget 2021 and 12MP); our conviction for the sector only grows stronger by the day. Suncon remains our top pick within the big cap space. OUTPERFORM on unchanged TP of RM2.45.

Within our estimate but below consensus. 2QFY20 earnings of RM4.6m brought 1HFY20 to RM22.1m – broadly within our estimate at 32% but below consensus at 25%. While we expect the remaining two quarters in FY20 to gradually improve which explains why we deem 1HFY20 as in line, we think consensus FY20 CNP forecast of RM88m is slightly farfetched, implying an average of RM33m/quarter for 3QFY20 and 4QFY20 which is the pre-Covid-19 levels. We think it is only logical to expect profitability levels to normalise from FY21. The 1.25 sen dividend announced was in line.

2QFY20 CNP of RM4.6m plunged 74% QoQ stemming from the longer MCO period of 2 months' vs 2 weeks (in 1QFY20) as fixed costs on the back of a sharp decrease in revenue (-62%) resulted in a CNP margin squeeze (-1.5ppt).

Dissecting 2QFY20 segmentally, Suncon’s construction segment performance was commendable for still being able to stay profitable as management managed to reduce some fixed overheads in tandem with the lower revenue. The same cannot be said for its precast segment which saw it registering a net loss of RM3.3m on a 92% QoQ dip in revenue as Singapore’s circuit breaker totally shut off Suncon from delivering its precast components across the border. That said, Suncon has gradually recommenced precast deliveries into Singapore with 19% of its jobs already given the green light to restart in June 2020. YoY, 1HFY20 CNP of RM22.1m was down 62% mainly from Covid-19 lockdowns.

RM2b replenishment target on track. Along with its results, SUNCON announced two new contracts worth RM747m from its parent SUNWAY to build: (i) a mixed development at Bandar Sunway known as CP2 worth RM344m, and (ii) three blocks of condominium in Kuala Lumpur known as Sunway Belfield worth RM403m. With RM1472m contract wins YTD, we are reassured that our/management’s FY20E target replenishment of RM2b is intact, underpinned by its tender-book of RM8.5b. With these awards, outstanding order-book currently stands at RM6.1b (as of Aug 2020) providing 3x cover.

No change to our earnings forecast post results.

Maintain OUTPERFORM with an unchanged SoP-derived TP of RM2.45 based on a construction PER of 18x (+1SD above its 5-year mean). We think our premium PER valuations is justified vs. other contractors given Suncon’s low risks nature from the receivable, replenishment, and execution perspectives – the three key risks that really matter to a contractor.

Source: Kenanga Research - 19 Aug 2020

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