Investment Highlights

• We maintain BUY on Sunway Construction (SunCon) with a lower fair value (FV) of RM2.18/share (vs. RM2.20/share previously), based on a FY24F PE of 16x, which is 0.5 standard deviation below its 5-year average of 18x. Our fair value includes a 3% premium to reflect the group’s unchanged 4-star ESG rating.

• We slightly lowered SunCon’s FY23F-FY24F core net profit (CNP) by 1%-6% due to lower construction margin assumptions. SunCon’s 9MFY23 results were below our expectation but within consensus, accounting for 64% of our forecast and 68% of street’s. As a comparison, 9MFY22 accounted for 69% of FY22 core net profit.

• We expect the group’s net profit to improve in the coming quarters on the back of a higher recognition of construction progress billings and larger contribution from precast segment.

• 9MFY23 core net profit (CNP) increased 4% YoY to RM96mil mainly due to 9% rise in revenue and a 13% decline in depreciation expense. Growth in the construction segment was driven mainly by maturing stages of works in India and higher contribution from sustainable energy projects.

• The precast division’s 9MFY23 revenue increased by 67% YoY to RM205mil on the back of increased development in Integrated Construction & Prefabrication Hub (ICPH) projects. These consist mainly of 17,000 flats launched by the Housing and Development Board (HDB) in Singapore and RM180mil precast orders secured this year.

• On a sequential basis, 3QFY23 CNP saw a 15% increase supported by a 10% expansion in the construction division. The growth was driven by solar projects and 21% jump in the precast segment with an improvement in profit margins from reversal of provisions for completed projects.

• YTD order book wins amounted to RM2.2bil. SunCon’s outstanding order book was flat QoQ at RM5.8bil (Construction: RM5.3bil; Precast: RM0.5bil) as at end-September 2023. This translates to a decent 2.1x of FY23F revenue. SunCon maintains its FY23F replenishment target of RM2bil, backed by a tender book of RM26bil.

• Potential jobs may come from Bayan Lepas LRT, construction of warehouses/data centres and internal building jobs from companies within Sunway group, especially medical centres.

• Although we are maintaining our FY23F replenishment assumption of RM2bil, our earnings estimates may be raised if SunCon wins either the MRT3 contracts or the Vietnam power plant project (SunCon’s portion amounts to RM6bil).

• While precast orders will be driven by existing plants in Senai and Iskandar, a requirement that HDB contractors must use local precast supplies for development projects in Singapore is expected to benefit SunCon, which launched a 49%-owned JV ICPH plant with Hong Leong Asia in 1HFY23. Going into 4QFY23, we believe that contribution from the precast segment will ramp up due to the launch of 6,000 units of flats by the HDB in December 2023. Precast plant utilisation rate YTD stood at 40% of its maximum capacity.

• 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 18x and offers decent dividend yield of 3%.

Source: AmInvest Research - 22 Nov 2023