Investment Highlights

• We cut our FY19–20F net profit forecasts by 13% and 17% respectively, reduced our FV by 13% to RM1.11 (from RM1.27) and maintain our UNDERWEIGHT call. Our new FV is based on 10x revised FY19 EPS, in line with our benchmark forward P/E of 10x for large- and mid-cap construction stocks.

• Sunway Construction’s FY18 net profit came in within our forecast and market expectations. Its FY18 net profit grew 9% YoY driven by higher construction profits (arising from the Parcel F building job in Putrajaya, Package V201 of MRT2 and International School of Kuala Lumpur building contract in Ampang), partially offset by lower precast profits (due to the completion of several projects coupled with higher rebar prices).

• Sunway Construction reiterated its guidance for order book replenishment in FY19F of RM1.5bil (including new pre-cast product orders). So far in FY19F, it has secured a sizeable building job, i.e. Tenaga HQ campus worth RM781mil. In FY18, its construction job wins and new precast product orders stood at RM1.32bil and RM229mil respectively.

• The earnings downgrade is to reflect slower progress billings for the LRT3 project, coupled with the reduction in our assumption for construction job wins to RM1.3bil annually in FY19–21F (from RM1.5bil) to bring ourselves more in line with the company’s guidance. Our forecasts also assume new pre-cast product orders of RM200mil annually in FY19-21F.

• At present, Sunway Construction’s outstanding construction and pre-cast product order books stand at RM5.7bil (Exhibit 2) and RM286mil respectively.

• We hold the view that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals, triggered by: (1) a major cutback in public infrastructure spending over the medium term as the government adheres to fiscal prudence; and (2) the permanent reduction in overall margins for players in the absence of high-margin directly-negotiated government jobs, as the government observes higher standards of transparency and accountability in public procurement.

Source: AmInvest Research - 26 Feb 2019