Investment Highlights

• We maintain BUY on Sunway Construction (SunCon) with an unchanged fair value (FV) of RM3.59/share based on 20x FY25F P/E, which is on par with its 3-year average. Our earnings forecast and 4-star ESG rating are unchanged.

• 1QFY24 PATAMI of RM32.4 mil (+16.4% YoY) was within ours and consensus expectations. This has been a clean quarter with no cost surge or accounting surprises. No dividend was announced for the period (same as last year).

• The construction sector saw strong revenue growth of 16% YoY on higher workflow and billings, but net income only increased by 7.6% YoY due to lower net income margin by 0.4 percentage points (PPT) YoY.

• The precast segment improved significantly with better revenue (+16% YoY) and profit (+15.5% YoY) as legacy low- margin projects (signed before Covid but the actual work was done during pandemic) have lapsed.

• However, sequentially, 1Q2024 net profit decreased by 34% QoQ due to the ramp-up of accelerated building progress and sustainable energy projects and jobs nearing completion in 4Q2023.

• Net gearing has increased to 0.56x, from 0.51x as at the end of 2023, after taking on more jobs. However, the t-12 ROE is at 17.4% with strong cash flow.

• Suncon’s orderbook has surged by 19% to RM6.3bil from the end of 2023, a backlog that will keep the company busy for at least two years. YTD, Suncon has secured RM1.7bil of new orders, which is on path to its target of RM2.5-3.0bil of job replenishment for 2024.

• We believe the profit margins on upcoming projects will be higher than in the past two years as costs increase and post-Covid inefficiencies have been priced in. Furthermore, many operating cost items have remained stable.

• Suncon currently trades at 18.5x 2025 PE, which is below its 3-year average of 20x, with a dividend yield of 3.3%.

Source: AmInvest Research - 23 May 2024