• Sunway Construction’s (SunCon) construction operation resumed to prepandemic levels in 3Q20. The faster-than-expected earnings recovery led to results being above market and our expectations.
• We upgrade 2020E core EPS by 13% yoy to reflect the strong recovery but cut core EPS by 5-6% in 2021-22E after trimming our profit margin assumptions.
• SunCon’s RM2.3bn new contract wins YTD is among the highest in the sector with good prospects to repeat this feat in 2021. SunCon remains our top midcap sector BUY with an adjusted target price of RM2.20, based on RNAV.

Faster-than-expected recovery

SunCon’s revenue increased 2-fold qoq to RM419m and net profit jumped nearly 10-fold qoq to RM24m from a low base in 2Q20. Core net profit was higher at RM32m (+606% qoq and -13% yoy) in 3Q20 due to provision for doubtful debts and goodwill write-off for its precast concrete operations. Assuming core net profit of RM32m in 3Q20 is repeated in 4Q20, full-year core earnings could hit RM86m, exceeding the consensus forecast of RM76m and our previous estimate of RM73m.

Still down against last year’s earnings

Construction activities were at a standstill for 2.5 months in 1H20 due to the government’s Movement Control Order (MCO) before resuming fully in 3Q20 with strict Standard Operating Procedures (SOPs) in place. Revenue was still down 28% yoy to RM925m, while net profit plunged 56% yoy to RM43m in 9M20 due to the MCO disruptions. Construction PBT was 48% yoy lower at RM61m in 9M20, while precast concrete incurred a pre-tax loss of RM0.7m.

Successful replenishment of order book

Its order book remains high at RM5.3bn as at 30 September 2020, equivalent to 3.3x 2019 revenue. SunCon secured RM2.3bn worth of new contracts YTD, among the highest in the industry. Good prospects for new contract wins with RM5.3bn active tenders and more than 50% for overseas projects in India, Singapore and the Philippines. The revival of mega infrastructure projects such as Klang Valley MRT Line 3 (MRT3) in 2021 augurs well for SunCon, which is an incumbent subcontractor for MRT2.

Top sector mid-cap BUY

We expect a strong rebound in core earnings from RM82m (-38% yoy) in 2020E to RM121m (+46% yoy) in 2021E as progress billings accelerate and new contract wins remain high at RM2.4bn in 2020E and RM2bn in 2021E. Maintain our BUY call. Key risks are political uncertainties and slow roll-out of infrastructure projects.

Source: Affin Hwang Research - 20 Nov 2020