Investment Highlights

• We maintain HOLD on Sunway Construction (SunCon) with an unchanged fair value of RM1.69/share based on a 14x FY23F PE. This is in line with our benchmark PE for large-cap construction stocks. We also ascribe a 3% premium to reflect our 4-star ESG rating.

• We make no changes to our FY22F–24F earnings as SunCon’s core net profit (CNP) of RM72mil for 1HFY22 was within expectations, accounting for 48% of our forecast and 55% of consensus estimates. SunCon also declared first interim dividend of 3 sen/share, which makes up 43% of our FY22F DPS of 7 sen/share.

• 1HFY22 CNP improved 2.6x YoY to RM72mil mainly due to a rebound in the construction segment (+2.6x YoY). The higher earnings from the construction division was supported by the resumption of economic activities after Covid-19 lockdowns and contribution from the Indian division. Meanwhile, 1HFY22 earnings from the precast segment fell by 20% YoY due to the impact of high steel bar prices.

• On a quarterly basis, CNP improved 3% to RM37mil in 2QFY22. Earnings from the precast segment recovered by 87% to RM2mil in 2QFY22 on easing steel bar prices. On the other hand, 2QFY22 construction earnings slipped 11% QoQ in tandem with a similar decline in revenue due to the completion of some of the construction projects.

• SunCon’s FY22F internal job win target (including supply of precast products) remains at RM2bil. So far, SunCon has won new projects worth RM563mil, bringing its total outstanding order book to RM4.2bil (construction: RM3.7bil; precast: RM0.5bil). This translates to an unexciting 1.5x of FY22F revenue. Notable job wins were the LRT3: GS06 worth RM191mil (until 3QFY23) and the RTS Link Package P2A worth RM112mil (until 2QFY25).

• Despite achieving only 27% of its targeted job wins, we are keeping our order book replenishment assumption of RM1.7bil annually for SunCon from FY22F to FY24F. Potential replenishment may come from the construction of data centres and semi-conductor manufacturing plants, internal building jobs from related companies within the Sunway Group and the above ground portion of the MRT3.

• Also, we expect operating margins to stabilise as labour shortages gradually ease. SunCon has obtained approval for 400 Indonesian workers, of which 100 will be arriving in Sep 2022 and the remaining 300 by Dec 2022. Meanwhile, steel prices have slid 9% from the peak in Apr/May 2022.

• Risks to SunCon include: (i) eroding operating margins from rising building material costs and labour shortages; and (ii) delays/cost revisions of mega projects.

• We view the stock as fairly valued with a limited upside of 9%, based on a forward PE of 14x.

Source: AmInvest Research - 24 Aug 2022