Investment Highlights

• We cut our FY21F net profit forecast by 21% but keep relatively unchanged our FY22–23F numbers and fair value (FV) of RM1.69 based on 14x FY22F EPS plus a 3% premium to reflect our 4-star ESG rating (Exhibit 5). The 14x multiple is in line with our benchmark forward PE for large-cap construction stocks. Maintain HOLD.

• Sunway Construction’s 1HFY20 net profit came in below expectations at only 25% of both our full-year forecast and the full-year consensus estimates. We believe the variance against our forecast came largely from construction activities coming to a standstill in June 2021 (and during the first two weeks of July 2021) on tightened pandemic restrictions as Covid-19 infections surged.

• Nonetheless, its 1HFY21 net profit still rose 54% YoY from a low base a year ago. Recall, construction activities came to a complete halt for two months in 1HFY20 when the pandemic first started.

• Our earnings downgrade is to reflect its productivity loss arising from pandemic restrictions up until mid-July 2021. We believe its productivity shall have improved from thereon as more and more workers can return to the construction site after receiving vaccination under the Construction Industry Vaccination Programme (CIVac) and Program Imunisasi Industri Covid-19 Kerjasama Awam-Swasta (PIKAS). At present, the percentages of its workers with one and two vaccine doses administered stand at about 88% and 55% respectively.

• During our recent engagement with the company, Sunway Construction reiterated its guidance for RM2bil overall job wins (including the supply of precast products) in FY21F. Thus far in FY21F, it has secured new jobs worth a total of RM620mil (comprising RM435mil construction jobs and RM185mil precast product supply contracts in Singapore). Its outstanding construction and precast product order backlogs stand at RM4.4bil (Exhibit 2) and RM401mil respectively.
   
• For the Rest of the Year, Sunway Construction Is Eyeing:

1. Infrastructure jobs locally (assuming the MRT3 project is to get off the ground) and India (but preferably a nonhybrid annuity model type given that Sunway Construction has already committed significant financial resources for its two Indian highway projects based on a hybrid annuity model, both in Tamil Nadu, i.e. the Thorapalli Agraharam–Jittandahalli section of NH-844 (RM508mil) and the Meensurutti–Chidambaram section of NH-227 (RM315mil);
    
2. External piling jobs (including those in overseas markets such as Singapore and the Philippines);
    
3. Related-party building jobs (for instance, from the Sunway Valley City project in Penang Island);
    
4. Potential sub-contract works from the recently announced fourth cycle of the large-scale solar project (LSS4) as we understand that Sunway Construction is the “technical partner” for some of the bidders; and
    
5. More precast product supply contracts from Singapore. We maintain our slightly more conservative assumption for Sunway Construction’s construction job wins of RM1.5bil annually in FY21–23F.

• We remain cautious on the outlook for the local construction sector. It is uncertain if the incoming government will keep to its predecessor’s plan to kick start the MRT3 project in 2H 2021. Meanwhile, macro and operational challenges remain aplenty in the sector. These include high national debt weighing on the government’s ability to roll out public projects, a 12th Malaysia Plan that has yet to be revealed, mega projects that have lost their shine (less impactful as they are not fast-tracked and implementation models that gravitate towards a public-private partnership where the main contractor may be required to take on certain operating/commercial risk and/or participate in the funding of the project), intensifying competition (as both public and private projects dry up amidst growing presence of foreign contractors especially large state-owned Chinese contractors), and higher operating cost and risk, lower efficiency and supply-chain disruptions as the pandemic rages on.

• We believe Sunway Construction can weather the sector downturn better given its proven ability to compete under open bidding, coupled with the availability of building jobs from its parent and sister companies under the Sunway Group. However, its valuations are fair at 13–22x forward earnings on muted sector prospects.

Source: AmInvest Research - 20 Aug 2021