Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and fair value of RM1.55 based on 12x FY21F EPS, in line with our benchmark forward P/E of 12x for large and mid-cap construction stocks.
• Sunway Construction’s 9MFY20 net profit came in at only 62% and 56% of our full-year forecast and full-year consensus estimates respectively. However, we consider the results within expectations as we expect earnings recovery to gain further momentum in 4Q, with construction activities returning to almost 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 9MFY20 net profit fell 56% YoY largely due to the earnings vacuum in 2QFY20 when construction activities came a complete halt during the height of the movement control order while Sunway Construction continued to incur certain fixed overheads (such as wages, staff welfare, depreciation, equipment rentals, headquarters expense, etc).
• Meanwhile, YTD, Sunway Construction has secured new construction jobs worth a total of RM2.28bil (vs. our assumption of RM2.3bil) and its outstanding construction order book stands at RM5.4bil (Exhibit 2). For FY21–22F, our assumption for Sunway Construction’s construction job wins is 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 immediately 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 in 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 14–35x forward earnings on muted sector prospects.

Source: AmInvest Research - 20 Nov 2020