Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and fair value of RM1.42 based on 12x FY21F EPS, in line with our benchmark forward P/E of 12x for large and mid-cap construction stocks. However, we reduce FY20F dividend forecast to 2.5 sen (from 7 sen) in response to Sunway Construction’s cut in its FY20F first interim dividend to 1.25 sen (from 3.5 sen a year ago).
• Sunway Construction’s 1HFY20 net profit came in at only 22% and 21% of our full-year forecast and full-year consensus estimates respectively. However, we consider the results within expectations as we expect a stronger 2H with construction activities normalising to pre-pandemic levels. 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.
• Its 1HFY20 net profit fell 71% YoY as construction activities came to a halt during the peak of the pandemic in Mar-May 2020 but Sunway Construction continued to incur certain fixed overheads (such as wages, staff welfare, depreciation, equipment rentals, headquarters expense, etc), severely hurting its bottom line.
• Meanwhile, Sunway Construction has secured building contracts worth a total of RM747mil from related companies comprising:

           1. Additional works for a commercial development in Sunway South Quay (Parcel CP2), Bandar Sunway (RM344mil); and

           2. Three residential towers in Sunway Belfield, KL (RM403mil).

• The latest job wins have boosted its YTD new construction jobs secured to RM1.4bil and outstanding construction order book to RM5.8bil (Exhibit 2). Meanwhile, its precast product unit has bagged RM38mil of new orders YTD, boosting its order backlog to RM320mil.
• We are keeping 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 15–28x forward earnings.

Source: AmInvest Research - 19 Aug 2020