Investment Highlights

• We maintain BUY on Sunway Construction (SunCon) with a higher fair value (FV) of RM2.08/share (from RM1.92/share previously), based on a rolled-forward FY24F PE of 16x - 0.5 standard deviation below its 5-year average of 20x. This includes a 3% premium to reflect the group’s unchanged 4- star ESG rating.

• We cut FY23F-FY24F core net profit (CNP) by 6%-12% due to lower construction margin assumptions as SunCon’s 1HFY23 results was below our expectation, accounting for only 35% of our earlier FY23F earnings but largely within consensus.

• Nevertheless, we expect the group’s net profit to improve over the following quarters on the back of a higher recognition of construction progress billings. SunCon also declared the first interim dividend of 3 sen/share, which makes up half of our FY23F DPS of 5.8 sen/share.

• 1HFY23 revenue decreased by 5% YOY to RM1.13bil due to lower construction segment turnover, bringing CNP fell 20% YoY to RM58.8mil due to normalising construction profit margin as 1HFY22 benefited from expedited progress and cost finalisation of completed projects such as TASCO and LRT 3:GS06. This resulted in a 14% contraction in construction pretax profit to RM75mil.

• The precast division’s 1HFY23 revenue doubled YoY to RM69mil due to increased development in Integrated Construction & Prefabrication Hub (ICPH) projects, translating to a 56% YoY surge in pretax profit to RM56mil.

• On a sequential basis, 2QFY23 CNP saw an increase by 22% mainly due to an 8% increase from the construction division and 2.5x jump in precast segment.

• YTD order book wins amounted to RM1.6bil, which lowered SunCon’s outstanding order book by 3% QoQ to RM5.8bil (Construction: RM5.3bil; Precast: RM0.5bil) as at end-June 2023. Nevertheless, this translates to a still-decent 2.0x of FY23F revenue.

• SunCon maintains its replenishment target of RM2.0bil for FY23F, backed by a tender book of RM27bil. 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.

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  Notwithstanding our FY23F replenishment assumption being maintained, we may raise our earnings estimates if SunCon wins either the MRT3 project or the Vietnam power plant project (SunCon’s portion amounts to RM6bil).

• While precast orders will be driven mainly by the group’s existing plants in Senai and Iskandar, increasing regulations towards Housing and Development Board (HDB) contractors to use local precast supplies for development projects in Singapore are expected to benefit SunCon, which launched a 49%-owned JV ICPH plant with Hong Leong Asia last month.

• 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) lower margins due to higher-than-expected building material costs and labour shortages; and (ii) shelving of mega projects.

• The stock currently trades at an undemanding 14x FY24F PE, significantly below its 5-year average of 20x and offers decent dividend yields of 3%.

Source: AmInvest Research - 24 Aug 2023