Investment Highlights

• We cut our FY19–21F net profit forecasts by 9%, 6% and 6% respectively, but only trim our FV by 2% to RM1.09 (from RM1.11) as we roll forward our base year to FY20F. Our new FV is based on 10x revised FY20 EPS, in line with our benchmark forward P/E of 10x for large- and mid-cap construction stocks. Maintain UNDERWEIGHT.

• Sunway Construction’s 1QFY19 results disappointed us and the market, coming in at only 22% and 21% of our fullyear forecast and full-year consensus estimates respectively. We believe the variance against our forecast came largely from the poor performance by the pre-cast concrete product division, which barely broke even during 1QFY19 due to margin squeeze. We have reflected the challenging operating environment for the division in our forecasts.

• Sunway Construction’s 1QFY19 net profit fell 13% YoY due to lower construction profits (Parcel F building job in Putrajaya at the tail-end, coupled with the slowdown in the MRT2 and LRT3 projects pending the design change to downsize the stations) and the sharp plunge in the profitability of pre-cast concrete products as mentioned.

• 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 new construction jobs worth RM1bil and new pre-cast product orders worth RM31mil.

• It said that it has tendered for three road/rail projects in India and is venturing into the piling sector in Singapore. It is also eyeing three hospital expansion projects of parent Sunway Bhd.

• There is no change to our forecasts that assume construction and pre-cast product job wins of RM1.3bil and RM200mil annually in FY19-21F.

• At present, Sunway Construction’s outstanding construction and pre-cast product order books stand at RM5.4bil (Exhibit 2) and RM316mil respectively.

• We acknowledge that the revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects shall result in more jobs available in the market for local construction players. However, we believe the market has not priced in enough risk premium to reflect the following: 1. The fact that the latest mega projects are driven by world-class Chinese contractors (and Chinese funding) which probably leaves local contractors with only low-value/low-margin supporting roles in the projects; and 2. The fact that given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence which means the revival of the ECRL project could be a “zero-sum game” as it impedes the government’s ability to implement other public infrastructure projects.

• We believe Sunway Construction can weather the sector downturn better given its proven ability to compete under an open bidding system, coupled with the availability of building jobs from its parent and sister companies under the Sunway group. However, valuations are unattractive at 18–19x forward earnings on muted sector prospects.

Source: AmInvest Research - 17 May 2019