Sunway Construction Group - Recovery on Track

Date: 08/09/2020

Source  :  HLG
Stock  :  SUNCON       Price Target  :  2.07      |      Price Call  :  BUY
        Last Price  :  1.92      |      Upside/Downside  :  +0.15 (7.81%)

Suncon’s earnings are expected to recover in 2H20 on the back of speedy normalisation of construction activities. Outstanding order book of RM5.3bn translates into a healthy 3.0x cover ratio. Its replenishment guidance of RM2bn is on track, likely will materialise in 4Q20. While it may be early to guide on FY21, we believe it may not stray too far from RM1.5-2.0bn given its steady tender book. Tweak FY20-22 earnings downwards by 0.3-1.3% after revising our margin assumptions marginally. Maintain BUY with unchanged TP of RM2.07 based on 15x ex-cash PE multiple. We believe given its impressive execution track record, Suncon is well positioned to partake in pump priming initiatives.

We Met Up With Management Last Week With the Following Key Takeaways:

Recap of 2Q20. Profitability drastically reduced in 2Q20 due to the MCO as Suncon recorded core earnings of RM4.6m (-74% QoQ, -86% YoY). According to management for most of April and May, operations were halted. Construction activities were ramped up in June with productivity levels normalising by early July. We believe its access to screening facilities and involvement in mega projects facilitated its speedy resumption of works. Given the pace of productivity normalisation, we are anticipating stronger quarters ahead.

Close to FY20 target. Suncon’s outstanding orderbook amounts to RM5.3bn, translating into healthy 3.0x cover on FY19 revenue. Despite a difficult year, Suncon has managed to stay on course in meeting its replenishment guidance of RM2b n for FY20. Having achieved c.RM1.5bn YTD, remainder should come in by 4Q20 with jobs in relation to Velocity 2. In the event ongoing tenders in India materialise, this will bring job wins above its guidance. We reckon potential awards from India may be further delayed to FY21 on the back of escalating Covid-19 situation there. Beyond FY20, management is in the midst of finalising its replenishment targets. Taking cue from its rather stable active tender book (slightly north of RM8bn), we do not expect a significant stray from the RM1.5-RM2.0bn range.

Diversifying into RE. In an effort to diversify its operations, Suncon is aiming to expand into RE. While its RE related projects have so far been small scale internal solar jobs, we understand Suncon recently submitted EPCC bids for 2 packages (50MW each) for LSS4. Award outcome is expected by end-2021 with EPCC works commencing in FY22. We estimate a potential earnings contribution of roughly RM15- 18m.

Slower precast. Operational resumption for its precast segment has been slower due to still slow construction activities in SG. Approximately, only 20% of Suncon clients have resumed work. Stringent SOP measures as well as resurgence of some Covid- 19 cases amongst foreign workers have plagued restarting efforts. We gather that HDB launches this year is on track for 16-17k units, suggesting extended precast order backlog once construction activity picks up.

Forecast. Tweak FY20-22 earnings downwards by -0.9/-0.3/-1.3% after revising our margin assumptions marginally.

Maintain BUY, TP: RM2.07. 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 - 8 Sept 2020

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