Sunway Construction’s (SunCon) operations have been adversely impacted by the government’s Movement Control Order (MCO) since mid-March. The 1Q20 results were below market and our expectations. Core net profit fell 40% yoy to RM16.7m on lower revenue and a profitmargin squeeze. We cut our core EPS by 7-35% for 2020-21E assuming slower construction progress billings and lower EBIT margin. But we lift our 2022E core EPS by 4% to reflect higher progress billings to catch up on work schedules. We raise our target price to RM2.16 (based on an unchanged 10% discount to RNAV), from RM1.94 previously.

Weak Construction Progress Billings in 1Q20

Net profit of RM16m (-40% yoy) comprised only 12-14% of consensus fullyear forecasts of RM132m and our ingoing estimate of RM118m. Sunway has stopped work at all its sites since 18 March 2020 due to the imposition of the MCO by the government. Consequently, 1Q20 revenue fell 17% yoy dragged down by lower construction revenue (-19% yoy), which was partly offset by the higher precast concrete revenue (+10% yoy). PBT fell 47% yoy to RM21m in as revenue fell while some costs were fixed, leading to the EBIT margin contracting to 5.2% in 1Q20, compared to 8.0% in 1Q19.

Good Order-book Replenishment

SunCon secured RM513m worth of new contracts in 1Q20, increasing its order book to RM5.4bn. Adding the new Sunway International School and the MEP works for Klang Valley MRT Line 2 underground-station projects secured in 2Q20, YTD new contract wins increased to RM688m. SunCon maintained its target new-contract wins of RM2bn in 2020 with active tenders worth RM7.3bn currently (>50% are overseas projects in India, Singapore, Myanmar and Philippines). There is potential upside to our EPS forecasts if SunCon achieves its RM2bn new-contract win target as we only assume RM1bn.

Earnings Cut to Reflect Slower Progress Billings

We cut our core EPS by 35% in 2020E to reflect slower progress billings and EBIT margins due to the MCO impact. We expect results in 2Q20 to remain weak as construction works have only resumed since 4 May 2020 after SunCon received government approval.

Our Top Construction Sector Pick

We raise our RNAV/share to RM2.40 from RM2.16 assuming higher sustainable construction earnings of RM140m and a higher target PER of 16x (RM130m and 15x previously). We reaffirm our BUY call with a higher 12- month TP of RM2.16, based on an unchanged 10% discount to RNAV. Key downside risk: slow award of new public-sector projects.

Source: Affin Hwang Research - 22 May 2020