Investment Highlights

• We cut our FY20F net profit forecasts by 40% but keep our FV relatively unchanged at RM1.18 based on 10x FY21F EPS, in line with our benchmark forward P/E of 10x for large and mid-cap construction stocks. Maintain UNDERWEIGHT.

• Sunway Construction’s 1QFY20 results came in significantly below expectations at only 12% of both our full-year forecast and full-year consensus estimates. The main culprit was the 2-week impact from the movement control order (MCO) during 1Q which turned out to be much more damaging than expected (and shall continue to wreak havoc until at least in 2Q). We have reflected this in our earnings downgrade.

• Its 1QFY20 net profit fell 47% YoY as construction activities came to a halt from 18 Mar 2020 but Sunway Construction had to continue spending on fixed overheads. We believe, not helping either was the still slow progress at the LRT3 project (even before the MCO) that makes up about a third of its outstanding construction order book.

• Thus far in FY20F, Sunway Construction has secured new construction jobs worth RM0.7bil (including a RM121mil building job for Sunway International School, Bandar Sunway, announced yesterday) but none for precast products as yet. Its outstanding construction and precast product order books stand at RM5.2bil (Exhibit 2) and RM286mil respectively.

• No change to our assumptions on construction job wins of RM1.5bil and precast product order replenishment of RM200mil annually in FY20–22F (vs. RM1.6bil and RM160mil secured respectively in FY19). This is slightly more conservative as compared with Sunway Construction’s guidance for RM2bil new jobs (construction and precast products combined) in FY20F.

• Given the soft construction sector locally, it has stepped up its hunt for jobs in overseas markets, particularly India, Myanmar and Singapore (piling jobs). Already, in Mar 2020, Sunway Construction, via a 60:40 consortium with local partner RNS Infrastructure Ltd, secured a 865 crore (RM508mil) contract for the construction of Thorapalli Agraharam–Jittandahalli Section of NH-844 from Km 25.000 to Km 63.500 in Tamil Nadu, India, from the National Highways Authority of India (NHAI).
• We believe the recent change in the political landscape has not altered the subdued outlook for the local construction sector. Given the still elevated national debt, coupled with the recent collapse of oil prices that will hurt petroleum revenues, we believe the government has very limited room for fiscal manoeuvre which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term, such as the MRT3 and the KL–Singapore high-speed rail.
• 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 17–31x forward earnings.

Source: AmInvest Research - 22 May 2020