Investment Highlights

• We maintain HOLD on Sunway Construction (SunCon) with a lower fair value (FV) of RM1.51/share (vs RM1.69/share previously). Our FV is based on 14x FY23F PE, in line with our benchmark PE for large-cap construction stocks. We also ascribe a 3% premium to reflect our 4-star ESG rating.

• SunCon’s 9MFY22 core net profit (CNP) of RM98mil was below our expectations, but within consensus estimates. The results accounted for 65% of our full year forecast and 74% of consensus estimates. The deviation is due to slower-than-expected progress billings from ongoing projects.

• We lower our earnings for FY22F by 13%, FY23F by 10% and FY24F by 9% to adjust for slower revenue recognition and lower order book replenishment assumptions.

• 9MFY22 CNP surged 85% YoY to RM98mil as PBT in its construction segment doubled to RM122mil, supported by the resumption of economic activities after pandemic lockdowns and contribution from the Indian divisions. Meanwhile, PBT from precast segment grew 4.6x YoY to RM5mil as the previous corresponding period was affected by lockdowns in Malaysia and Singapore.

• On a quarterly basis, CNP fell by 34% to RM25mil in 3QFY22 mainly due to the decline in earnings of the construction segment. This can be attributed to higher revenue and PBT contribution from completed projects in the previous quarter. However, the drop was partially cushioned by precast PBT, which grew 35% QoQ to RM3mil due to higher progress from newer projects.

• YTD order book wins amounted to RM882mil, bringing outstanding order book to RM4bil (construction: RM3.5bil; precast: RM0.5bil). This translates to an unexciting 1.6x of FY23F revenue. Notable job wins were Sunway Flora (RM278mil), LRT3: GS06 (RM191mil) and RTS Link Package P2A (RM112mil).

• Since SunCon had only achieved 44% of their targeted FY22F job wins of RM2bil, we lower our order book replenishment assumption for FY22F to RM1.2bil from RM1.7bil, but raise FY23F to RM2bil from RM1.7bil.

• Potential replenishments may come from the construction of data centres and semi-conductor manufacturing plants and internal building jobs from related parties within the Sunway Group. We also believe SunCon is well positioned to secure MRT3 jobs given its strong balance sheet and proven track records in MRT1 and MRT2. However, we think that project owners are holding back on the awards as they adopt a wait-and-see approach post-GE15.

• We expect operating margins to stabilise as labour shortage eases. Recall that SunCon had obtained approval for 400 Indonesian workers earlier this year. Out of these, 300 have arrived and the remaining 100 will arrive by the end of the year. Including the existing 100 foreign workers, SunCon’s migrant workforce will amount to 500 in total. In comparison, SunCon had a peak of 800 foreign workers during the construction of MRT2 and LRT3. Additionally, DOSM reported that labour market continued its recovery at a steady pace in 3Q2022, with the unemployment rate falling to 3.7% from 4.7% a year ago, and slowly recovering to pre-pandemic levels. We also anticipate building material costs to ease from its peak in 2QFY22.

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

• SunCon will be removed from MSCI Global Small Cap Index by the end of this month. Hence, we view the stock as fairly valued with a limited upside of 6% trading at FY23F PE of 13.6x – near our benchmark of 14x for large-cap construction companies.

Source: AmInvest Research - 23 Nov 2022