Investment Highlights

• We maintain our forecasts but raise our fair value (FV) by 20% to RM1.42 (from RM1.18 previously) based on 12x FY21F EPS (from 10x previously) to reflect the ample liquidity in the system that lifts prices across asset classes. At 12x, the multiple is also in line with our updated benchmark forward P/E of 12x for large and mid-cap construction stocks. However, we believe Sunway Construction’s current market valuations are still rich. Maintain UNDERWEIGHT.

• In its quarterly results due to be announced on 18 Aug 2020, we expect to see Sunway Construction turning in a small net profit of between RM5mil and RM10mil in 2QFY20, translating to a 39–70% QoQ earnings decline. This will not be a major surprise given the movement control order (MCO) that lasted 1–2 months vs. only two weeks in the preceding quarter. Construction activities came a complete halt during the height of the MCO while Sunway Construction continued to incur certain fixed overheads (such as wages, staff welfare, depreciation, equipment rentals, headquarters expense, etc), severely hurting its bottom line.

• We view a profitable 2QFY20 for Sunway Construction, if it so happens, as commendable as we expect a lossmaking Apr–June 2020 quarter for most contractors. We understand that Sunway Construction has been able to adopt and adapt to the Covid-19 prevention standard operating procedure rather quickly and has been normalising its operations locally since June 2020.

• Cumulatively, 1HFY20 net profit of between RM21.4mil and RM26.4mil will translate a YoY earnings decline of 59–67%. This compares with our full-year forecast of RM83.2mil and the full-year consensus estimates of RM89.0mil, both implying a strong recovery in 2H.

• Meanwhile, thus far in FY20F, Sunway Construction has secured new construction jobs worth RM0.7bil but none for precast products as yet. Its outstanding construction and precast product order books stand at RM5.2bil (Exhibit 1) and RM286mil respectively.

• There is 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 still elevated national debt, 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.

• Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.

• 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 16–30x forward earnings.

Source: AmInvest Research - 10 Aug 2020