KUALA LUMPUR (Nov 22): Lower revenue and margin assumptions, coupled with the fact that key new projects are still in the early stages of construction, have led some investment analysts to cut their earnings forecasts and target prices (TPs) for Sunway Construction Group Bhd (SunCon).

However, they still maintain their “buy” recommendation on the stock, as SunCon has strong prospects with the imminent roll-out of key public infrastructure projects and strong earnings visibility, underpinned by an outstanding orderbook of RM5.79 billion. Additionally, the group is expected to benefit significantly from its precast business.

Kenanga Investment Bank Bhd said SunCon’s core net profit of RM96.1 million for the nine months ended Sept 30, 2023 (9MFY2023) fell below expectations, reaching only 66% and 68% of the research house’s full-year forecast and the full-year consensus estimate, respectively, due to slower pickup in the group’s construction work progress and weaker margins.

“Year-on-year, despite 9MFY2023 revenue growing 9%, its core profit fell 2%, as key new projects were still at their initial stages of construction, where profit margins were typically lower (decreasing from 7.7% to 7.1%),” it said in a note on Wednesday.

“Not helping either was a higher interest cost, largely from borrowings to fund its projects in India,” said Kenanga, and this has prompted the research house to trim SunCon’s net profit projection by 7% and 6% for the financial year ending Dec 31, 2023 (FY2023) and FY2024.

Following the earnings revision, Kenanga has lowered its TP for SunCon by 5% to RM2.26 from RM2.39 previously, based on an unchanged 18 times the forecasted earnings per share (EPS) for FY2024. The valuation, Kenanga said, is in line with its approach for other big companies, notably Gamuda Bhd (outperform; TP: RM5.45) and IJM Corp Bhd (outperform; TP: RM2.15).

Separately, AmInvestment Bank Bhd trimmed SunCon’s FY2023-FY2024 core net profit by 1%-6%, due to lower construction margin assumptions. However, the projection may be revised higher, if SunCon wins either the MRT3 contracts or the Vietnam power plant project.

The research house shaved SunCon’s fair value to RM2.18 from RM2.20, based on a forecasted price-to-earnings ratio of 16 times for FY2024, which is a 0.5 standard deviation below its five-year average of 18 times.

“The stock currently trades at an undemanding 14x FY2024F PE (price-earnings), significantly below its five-year average of 18x, and offers [a] decent dividend yield of 3%,” said AmInvestment.

Other research houses, such as RHB Investment Bank Bhd, Hong Leong Investment Bank Bhd (HLIB) and MIDF Research, did not change their earnings forecasts and TPs, as they expect progress on the group’s existing construction contracts to pick up, coupled with finalisation of several projects by year-end.

Aside from MRT3, HLIB said it sees SunCon as a contender for the Penang LRT. “We [also] expect SunCon to build on their successful foray into data centres (two jobs in hand), considering strong flows. Meanwhile, internally, there could be more jobs from parent-co’s Iskandar development next year,” it added.

RHB’s TP was RM2.22, while HLIB and MIDF had a TP of RM2.16 and RM2.09, respectively.

At the time of writing on Wednesday, shares of SunCon were up two sen or 1.06% at RM1.91, with some 120,500 shares traded. At this price, the group had a market capitalisation of RM2.47 billion.

The counter has risen over 20% year-to-date, and 33.6% in the past year.