• Sunway Construction’s (SunCon) construction and precast concrete activities gained momentum in 4Q20, driving core EPS growth of 19% qoq. However, core EPS was down 31% yoy in 2020 due to lockdowns in 1H20
• New contract wins of RM2.3bn exceeded its RM2bn target in 2020. SunCon has set a RM2bn target for new contract wins in 2021 with current active tenders of RM5.4bn. Precast concrete profit margin should improve in 2021E
• Likely strong core EPS growth of 32% yoy in 2021E, supported by high remaining order book of RM5.1bn. SunCon remains our top mid-cap sector BUY with a higher 12-month RNAV-based target price (TP) of RM2.22

Higher-than-expected Core Earnings

Core net profit of RM92m (-31% yoy) in 2020 was 12% above our forecast of RM82m and 21% above the consensus estimate of RM76m. But net forex and exceptional losses of RM19m reduced the headline net profit to RM73m in 2020. Revenue fell 12% yoy to RM1.55bn in 2020. Construction and precast concrete revenue declined 10% yoy and 35% yoy respectively due to disruptions caused by the pandemic lockdowns in Malaysia and Singapore. The squeeze in profit margin led to construction PBT falling 54% yoy, while precast concrete PBT declined 34% yoy due to slower demand for its products.

Gaining Momentum

Revenue jumped 50% qoq to RM627m in 4Q20, driven mainly by the ramp-up in progress billings for its Sunway building projects and final settlement for its Uttar Pradesh project in India through a conciliatory process. Its precast concrete division also saw a surge in revenue by 1.6-fold qoq and PBT jumping 2.6-fold qoq to RM4.3m in 4Q20 as all projects resumed operations in Singapore and given contributions from new high-margin projects.

Good Prospects to Replenish Order Book in 2021

Its order book remained high at RM5.1bn as at 31 December 2020, equivalent to 3.3x the 2020 revenue. SunCon secured RM2.3bn worth of new contracts in 2020, among the highest in the industry. It has good prospects for new contract wins with RM5.3bn in active tenders with 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

SunCon has secured RM366m of new contracts YTD and set a RM2bn target in 2021. We maintain our BUY call with a higher RNAV-based TP of RM2.22 to reflect the increase in net cash in 4Q20 (see Fig 5). Key risk: a slow roll-out of infrastructure projects.

Source: Affin Hwang Research - 24 Feb 2021