Sunway Construction’s (SunCon) 9M19 results were below market and our expectations. Net profit declined 9% yoy to RM98m in 9M19. The key reasons were slow construction progress billings and weak precast concrete earnings. We cut our core EPS by 8% for FY19E to reflect the delay in construction earnings recognition. SunCon secured RM1.7bn 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 target price of RM2.25, based on a 10% discount to its 2020E RNAV.

Slow Pick-up

SunCon’s net profit of RM98m (-9% yoy) in 9M19 comprised only 67-69% of market consensus and our 2019E forecasts of RM142-146m. Revenue plunged 21% yoy to RM1.28bn in 9M19, mainly due to slow construction progress billings. The reduction in scope of works and contract value for the Klang Valley MRT Line 2 (MRT2) and Light Rail Transit Line 3 (LRT3) projects contributed to the lower revenue. Works on LRT3 were delayed as negotiations to finalise the contract value are still ongoing. New building projects secured in 2019 are still in the preliminary stages of implementation.

Good Construction Margin, Weak Precast Concrete Earnings

PBT declined 14% yoy to RM117m in 9M19, entirely contributed by its construction division (-12% yoy) as its precast concrete division only managed to break even. The weak performance for the precast concrete segment (compared to PBT of RM3.9m in 9M18) was due to lower profit margins for legacy contracts, which are near completion. The construction PBT margin improved to 9.9% in 9M19 compared to 8.6% in 9M18 due to a better profit margin on finalisation of accounts for a completed project.

Good Order Book Replenishment

SunCon clinched RM1.7bn worth of new contracts YTD. Its remaining order book increased to RM5.6bn currently, equivalent to 2.5x 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

Good prospects to grow its order book with bids for new projects in Myanmar and India, and building projects from parent Sunway Bhd. We reiterate our BUY call with target price of RM2.25, based on 10% discount to RNAV. Key risk: Slow award of new public-sector projects.

Source: Affin Hwang Research - 20 Nov 2019