Investment Highlights

• We maintain BUY on Sunway Construction (SunCon) with an unchanged fair value (FV) of RM1.84/share. Our FV is based on 14x FY23F PE, in line with our benchmark for large-cap construction stocks. We also ascribe a 3% premium to reflect our 4-star ESG rating.

• We maintain our FY23F-FY24F earnings as SunCon’s FY22 core net profit (CNP) of RM131mil was within expectations, coming at 1% above our forecast and 4% higher than consensus estimates. SunCon has declared a DPS of 2.5 sen for 4QFY22 (4QFY21: 4.0 sen), bringing total DPS to 5.5 sen (FY21: 5.3 sen) for FY22.

• FY22 CNP fell 10% YoY to RM131mil despite revenue growth in the construction (+23%) and precast segments (+48%) due to higher operating cost in its construction segment and weaker JV earnings.

• On a QoQ basis, CNP almost doubled to RM38mil in 4QFY22 mainly due to the recalibration of margin for projects nearing completion and reversal of provision for a withdrawn legal case (RM13mil).

• FY22 order book wins amounted to RM0.9bil. This does not include the RM1.7bil data centre job in Sedenak Tech Park secured on 31 Dec 2022. Including this job, SunCon’s outstanding order book grew 12% to RM5.3bil (Construction: RM4.8bil; Precast: RM0.5bil) in FY22. This translates to a decent 1.8x of FY23F revenue.

• SunCon maintains its replenishment target of RM2bil for FY23F, backed by a tender book of almost RM21.3bil. Apart from the MRT3 and Vietnam power plant projects, potential jobs may come from the RTS Link, construction of warehouses and internal building jobs from companies within Sunway group.

• We keep our replenishment assumption of RM2.9bil for FY23F (including the RM1.7bil data centre job). We may raise our earnings estimates if SunCon wins either the MRT3 portion, expected in 2H2023, or the Vietnam power plant project in 2Q2023 (SunCon’s portion amounts to RM6bil).

• SunCon’s 49%-owned integrated construction and prefabrication hub (ICPH) precast plant in Singapore began operations at the end of Jan 2023. However, we believe that orders will be driven mainly by the group’s existing precast plants in Senai and Iskandar, Johor as the ICPH plant is still new.

• Recall that SunCon obtained approval for 400 Indonesian workers earlier last year. Out of these, 394 have arrived and the remainder will be arriving over the coming weeks. Including these, SunCon’s migrant workforce will amount to 600 in total. In comparison, SunCon had a peak of around 900 foreign workers during the construction of MRT2 and LRT3.

• To accommodate the RM1.7bil Sedenak Tech Park contract, SunCon has obtained approval for an additional 300 Indonesian workers. These are estimated to arrive by the end of 1H2023.

• Risks to SunCon include (i) eroding margins from higher-than-expected building material costs and labour shortages; and (ii) shelving of mega projects.

• We believe that SunCon is attractive as it is trading at an undemanding 12.9x FY23F PE, which is below our benchmark of 14x for large-cap construction stocks.

Source: AmInvest Research - 22 Feb 2023