Investment Highlights

• We cut our FY20–22F net profit forecasts by 17%, 4% and 3% respectively and reduce our fair value by 4% to RM1.36 (from RM1.42) based on 12x revised FY21F EPS, in line with our benchmark forward P/E of 12x for large and midcap construction stocks. Maintain UNDERWEIGHT.
• Sunway Construction has executed an agreement with LRT3 turnkey contractor MRCB George Kent to revise down the value of Packages GS07–08 of the LRT3 awarded to Sunway Construction by 41% to RM1,295mil (from RM2,178mil). To recap, this is pursuant to the initiative by the Pakatan Harapan government to downsize the LRT3 project by 47% to RM16.6bil from RM31.7bil.
• While the latest development is negative, it should not come as a surprise to the market. The revision has eroded Sunway Construction’s outstanding construction order book by RM883mil or 15% to RM5.0bil (Exhibit 1) from RM5.8mil previously. Similarly, Sunway Construction’s outstanding works on Packages GS07–08 of LRT3 have been cut by RM883mil or 56% to RM706mil from RM1,589mil previously. We have reflected these changes in our forecasts.
• Meanwhile, we are keeping our assumption on construction job wins of RM1.5bil annually in FY20–22F. This is slightly more conservative as compared with Sunway Construction’s guidance for RM2bil new jobs (construction and precast products combined) in FY20F. So for in FY20F, Sunway Construction has secured RM1.4bil worth of new construction jobs and RM38mil worth of new precast product orders.
• 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 16–34x forward earnings.

Source: AmInvest Research - 21 Aug 2020