Investment Highlights

• We raise our FY21–22F net profit forecasts by 11% each, increase our fair value by 11% to RM1.51 (from RM1.36) based on 12x revised FY21F EPS, in line with our benchmark forward P/E of 12x for large and mid-cap construction stocks. Maintain UNDERWEIGHT.

• Sunway Construction has secured building contracts worth a total of RM416mil from related companies comprising:
  
  1. Additional works for Sunway Medical Centre (Phase 4), Bandar Sunway (RM162.3mil); and 2. Plot B, Sunway Velocity
  
  2, comprising a retail mall and two serviced apartment blocks (RM253.6mil).
   
• The latest job wins have boosted its YTD new construction jobs secured to RM1.95bil and outstanding construction order book to RM5.5bil (Exhibit 1).
   
• We raise our assumption for FY20F construction job wins to RM2bil (from RM1.5bil) while keeping those for FY21– 22F at RM1.5bil annually as we are more inclined to see FY20F as an exceptional year that may not recur given the still weak outlook for the local construction and property sectors.

• 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 15–35x forward earnings on muted sector prospects.

Source: AmInvest Research - 1 Oct 2020