Investment Highlights

• We maintain BUY on Sunway Construction (SunCon)  with an unchanged fair value (FV) of RM1.92/share. Our  FV is based on FY23F PE of 14x, in line with our  benchmark for large-cap construction stocks. We also  ascribe a 3% premium to reflect the group’s 4-star ESG  rating. 

• We deem SunCon’s 1QFY23 results to be within  expectations although it accounts for only 15%-17% of  our FY23F core net profit and consensus’. We expect the  group’s net profit to improve over the following quarters  on the back of a higher recognition of construction  progress billings. 

• 1QFY23 CNP fell 25% YoY to RM27mil as progress  billings for existing construction projects have yet to  pick up. This resulted in a lower segment contribution  (-22% YoY). Furthermore, revenue and PBT were higher  back in 1QFY22 as construction projects were expedited  for completion by June 2022. 

• Despite the 44% YoY growth in revenue to RM469mil in  1QFY23, PBT of precast segment only inched up by  RM0.3mil to RM1.3mil. The division suffered higher  depreciation expense as the new plant in Singapore’s  Integrated Construction & Prefabrication Hub (ICPH) commenced operation in 1QFY23.

• On a sequential basis, 1QFY23 CNP came down by 30%  mainly due to recalibration of margins for construction  projects that were nearing completion. 

• YTD order book wins amounted to RM1.3bil, which  expanded SunCon’s outstanding order book by 14%  QoQ to RM6.0bil (Construction: RM5.6bil;  Precast: RM0.4bil) as at end-Mar 2023. This translates to  a decent 1.9x of FY23F revenue.

• SunCon maintains its replenishment target of RM2.0bil  for FY23F, backed by a tender book of RM23bil. Apart  from the MRT3 and Vietnam power plant projects,  potential jobs may come from Bayan Lepas LRT,  construction of warehouses and internal building jobs  from companies within Sunway group.

• While maintaining our replenishment assumption of RM2.0bil for FY23F, we may raise our earnings  estimates if SunCon bags either the MRT3 project or the Vietnam power plant project (SunCon’s portion  amounts to RM6bil). 

• SunCon’s 49%-owned 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.

• SunCon has a migrant workforce of 600 currently. The group has obtained approval for an additional 300  Indonesian workers which can be deployed at ongoing construction projects and potential new wins. In  comparison, at the peak, SunCon had a workforce of around 900 foreign workers during the construction  of MRT2 and LRT3.
   
• Risks to SunCon include (i) eroding margins from higher-than-expected building material costs and  labour shortages; and (ii) shelving of mega projects. 
   
• The stock currently trades at an undemanding 12.9x FY23F PE, 8% below our large-cap construction  stock benchmark of 14x.

Source: AmInvest Research - 23 May 2023