Sunway Construction’s (SunCon) 1H19 results were below market and our expectations. Net profit declined 10% yoy to RM64m in 1H19. The key reasons were slow construction progress billings and weak precast concrete earnings. We revise our core EPS by -7%/+2%/+2% for FY19/20/21E to reflect the delay in construction earnings recognition. SunCon secured RM1.54bn of new contracts, which makes it one of the most successful contractors in replenishing its order book YTD 2019. SunCon remains our top mid-cap sector BUY with a slightly higher target price (TP) of RM2.25, based on a 10% discount to 2020E RNAV.

Slow Pick-up

SunCon’s net profit of RM64m (-10% yoy) in 1H19 comprised only 42-44% of market consensus and our 2019E forecasts of RM147-153m. Revenue plunged 18% yoy to RM880m in 1H19 due to slow construction progress billings and lower revenue from its precast concrete operation (-4% yoy). The reduction in scope of work and contract value for the Klang Valley MRT Line 2 and Light Rail Transit Line 3 (LRT3) projects contributed to the lower revenue. There were also low progress billings for the LRT3 and some building projects due to design changes.

Good Construction Margin, Weak Precast Concrete Earnings

PBT declined 8% yoy to RM81m in 1H19, entirely contributed by its construction division (-3% yoy) as its precast concrete division only managed to break even. The weak performance for the precast concrete segment (compared to PBT of RM5.8m in 1H18) was due to lower profit margins for legacy contracts that will mostly complete in 3Q19. The construction PBT margin improved to 10% in 1H19 compared to 8.3% in 1H18 due to a better profit margin on finalisation of accounts for a completed project.

Good Order Book Replenishment

SunCon clinched RM1.54bn worth of new contracts YTD, including the RM310m Petronas Leadership Centre project secured recently. Its remaining order book increased to RM5.8bn currently, equivalent to 2.6x FY18 revenue, from RM5.2bn as at end-2018. SunCon has submitted tenders for road/railway projects in India, piling projects in Singapore, hospitals for Sunway and domestic Large Scale Solar 3 projects.

Top Mid-cap Construction BUY

We raise our 2020E RNAV/share estimate to RM2.50 from RM2.49 previously to reflect higher net cash at end-1H19. Based on the same 10% discount to RNAV, we raise our TP to RM2.25 from RM2.24. Maintain BUY. Key risk: Slow award of new public-sector projects.

Source: Affin Hwang Research - 19 Aug 2019