Sunway Construction - Weak 1H20 Results But Expect Better 2H20

Date: 19/08/2020

Source  :  AffinHwang
Stock  :  SUNCON       Price Target  :  2.16      |      Price Call  :  BUY
        Last Price  :  1.92      |      Upside/Downside  :  +0.24 (12.50%)

  • Net profit plunged 87% yoy and 93% qoq to RM2.2m in 2Q20 due to the full impact of the government’s Movement Control Order (MCO).
  • SunCon secured 2 building contracts from parent Sunway worth RM866m today, increasing total YTD new contract wins to RM1.47bn.
  • We expect revenue and earnings to see a strong rebound in 2H20 as progress billings accelerate. SunCon remains a top sector BUY with RM2.16 target price (TP), based on 10% discount to RNAV.

Below Expectations

SunCon’s 6M20 results were below market and our expectations. Net profit of RM18.5m (-71% yoy) in 6M20 only comprises 21% of the street’s 2020 forecast of RM88m and 24% of our previous estimate of RM76m. SunCon had to stop all construction activities in Malaysia from 18 March 2020 to 9 June 2020 due to the MCO. As a result, revenue plunged 43% yoy to RM506m in 6M20. Most of the revenue of RM140m recognised in 2Q20 was due to the full resumption of construction activities in June after meeting the government Covid-19 prevention requirements including the testing of all workers before being allowed to resume works at sites. Pre-tax profit fell 65% yoy to RM27.3m in 6M20 with construction earnings contracting 68% yoy and the precast concrete division incurring a pre-tax loss of RM2.8m.

New Contract Win Accelerates

SunCon secured RM725m of new contracts in 6M20 and another 2 new contracts from parent Sunway today. The company retained its new contract wins target of RM2bn in 2020 after achieving about RM1.47bn YTD. Active tenders outstanding is RM8.5bn with more than 50% of the tenders for overseas projects in India, Singapore and the Philippines. In addition, SunCon is vying for East Coast Rail Link piling jobs, Iskandar Bus Rapid Transit and more Sunway building contracts.

Mixed Earnings Revisions But Remains a Top Sector BUY

We cut core EPS by 5% in 2020E to reflect lower precast concrete earnings, partly offset by higher construction earnings. We raise our new contract wins assumption to RM2bn p.a. in 2020-21E (RM1.0-1.2bn p.a. previously), lifting core EPS by 2-3% in 2020-21E. The positive impact is partially offset by lower precast concrete earnings due to profit margin compression on slow resumption of construction works in Singapore due to strict Covid-19 prevention requirements (about 50% capacity utilisation currently). SunCon remains one of our top sector BUYs due to good prospects to grow its order book. Based on 10% discount to unchanged RNAV, our TP remains at RM2.16. Key downside risk: slow award of new public-sector projects.

Source: Affin Hwang Research - 19 Aug 2020

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Chart Stock Name Last Change Volume 
SUNCON 1.92 +0.02 (1.05%) 126,700 

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