Investment Highlights

• We keep relatively unchanged our forecasts and fair value of RM1.54 based on 12x FY21F EPS, in line with our benchmark forward P/E of 12x for large and mid-cap construction stocks. Maintain UNDERWEIGHT.

• Sunway Construction’s FY20 net profit beat our forecast by 6% but came in within consensus estimates. We believe the variance against our forecast came largely from slightly stronger progress billings as Sunway Construction had been able to adapt to the norms in its operations rather well.

• Nonetheless, its FY20 net profit fell 44% YoY largely due to the earnings vacuum in 2QFY20 when construction activities came a complete halt during the height of the initial movement control order while Sunway Construction continued to incur certain fixed overheads (such as wages, staff welfare, depreciation, equipment rentals, headquarters expense, etc).

• During FY20, Sunway Construction secured new construction jobs worth a total of RM2.2bil and its outstanding construction order book stands at RM5.2bil (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. Thus far in FY21F, Sunway Construction has secured new jobs worth a total of RM366mil.

• We maintain our view that the government will have very limited room for fiscal manoeuvre in 2021 given the elevated national debt, even before the pandemic. The government’s fiscal position has been weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic. All these have culminated in Fitch Ratings’ Dec 2020 downgrade of Malaysia’s long-term foreign-currency issuer default rating to ‘BBB+’ from ‘A-‘, on the heels of S&P Global Ratings’ June 2020 downgrade of Malaysia’s outlook to negative from stable.

• Under these circumstances, we believe the government is unlikely to roll out new public infrastructure projects in a major way over the short term. Also, given the suspension of parliament following the declaration of a state of emergency until 1 Aug 2021, the tabling of the 12th Malaysia Plan (which, among others, will earmark mega public infrastructure projects to be implemented in 2021–2025) scheduled for March 2021 could now be put on the back burner.

• 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 12x forward earnings on muted sector prospects.

Source: AmInvest Research - 24 Feb 2021