Sunway Construction’s (SunCon) 2019 results were within market and our expectations. Net profit declined 10% yoy to RM129m in 2019, mainly due to slow construction progress billings and weak precast concrete earnings. But PBT jumped 14% qoq to RM41m in 4Q19 as works on the Klang Valley LRT Line 3 (LRT3) accelerated. SunCon secured RM1.77bn of new contracts in 2019 and replenished its order book to RM5.23bn. We cut our core EPS by 8-10% in 2020-21E to reflect lower EBIT margins. SunCon remains our top mid-cap sector BUY with a lower target price of RM2.20, based on a 10% discount to its 2020E RNAV.

Construction Progress Billings Accelerate in 4Q19

Headline net profit of RM129m in 2019 was within market and our expectations of RM132-134m. Revenue plunged 22% yoy to RM1.77bn in 2019, 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 LRT3 projects contributed to the lower revenue. Revenue jumped 21% qoq to RM486m in 4Q19 as works on LRT3 picked up following the completion of contract re-negotiations. New building projects secured in 2019 are still in the preliminary stages of implementation.

Better Construction and Concrete Product Margins

PBT declined 14% yoy to RM157m in 2019, mainly due to lower construction progress billings. As the low-margin legacy contracts for its precast concrete division are completed, PBT improved to RM2.4m in 4Q19 compared to RM0.2m in 3Q19. The construction PBT margin improved to 9.6% in 2019 compared to 8.6% in 2018 due to a better profit margin on finalisation of accounts for a completed project.

Good Order Book Replenishment

SunCon clinched RM1.77bn worth of new contracts in 2019. Its remaining order book was replenished to RM5.23bn at end-2019. High order book/2019 revenue of 3x provides good earnings visibility. SunCon has submitted tenders for road/railway projects in India and Myanmar, piling projects in Singapore and RM1bn of in-house projects to replenish its order book in 2020. SunCon is targeting to secure RM2bn of new contracts in 2020 with RM7bn of tenders submitted currently.

Top Mid-cap Construction BUY

We introduce 2022E earnings assuming 9% yoy growth driven by RM1.7bn of new contracts, lower than RM2.2bn p.a. in 2020-21E as the construction cycle tapers down. We trim our TP to RM2.20 from RM2.25 to reflect lower net cash at end-2019 and segment valuations, still based on a 10% discount to our RNAV. Maintain BUY. Key risk: Slow award of new public-sector projects.

Source: Affin Hwang Research - 21 Feb 2020