Kenanga Research & Investment

Sunway Construction Group - A Slow Start, Earnings to Catch Up

Publish date: Tue, 23 May 2023, 10:46 AM

SUNCON’s 1QFY23 results met expectations with top line and core  net profit easing by double-digit, YoY. However, we are not  perturbed as its key jobs were still at the initial construction  stages. YTD, it has secured RM1.3b worth of new jobs - in-line to  meet our full-year assumption of RM2.2b. We maintain our  forecasts, TP of RM2.13 and OUTPERFORM call.

Within expectations. 1QFY23 core net profit of RM26m accounted for  only 16% and 18% of our full-year forecast and the full-year consensus  estimate, respectively. However, we deem the results within  expectations as we expect progress billings and hence earnings to pick  up for the rest of the year, underpinned by a sizeable outstanding order book of RM12b (of which RM6b is from a contract agreement for the  Song Hau 2 Vietnamese coal-fired power plant pending financial close  before works can proceed).

FY22 revenue declined 16% YoY as major jobs won recently i.e.  RM1.7b data center and RM0.6b RTS were still at the initial stages of construction. Core net profit declined 26% for the same reason.

Outlook. YTD, SUNCON has secured RM1.3b worth of new jobs, on  track to meet our FY23F replenishment assumption of RM2.2b (vs. the  company’s more conservative target of RM2.0b). Its job replenishment  prospects are bright, underpinned by a strong tender book of RM22.7b comprising: (i) data centre building, (ii) semiconductor factories, (iii) MRT3, and (iv) related party contracts i.e. Sunway.

Forecasts. Maintained.

We also maintain our TP of RM2.13 based on 16x PER, at the upper  range of our coverages ascribed 9 to 18x PER for contractors’ given  SUNCON’s larger sized market cap and its sterling track record within  the local construction space with multiple successful mega  infrastructure project completions.

We like SUNCON for: (i) its strong replenishment pipeline from parent  SUNWAY, (ii) its dominant position in the local construction space with  extensive capabilities in building, infrastructure, solar, mechanical,  electrical and plumbing works, and (iii) its strong balance sheet that  allows it to participate in deferred payment model projects. We accord a  5% premium to its TP given a 4-star ESG rating as appraised by us  (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) sustained weak flows of construction jobs  from public and private sectors, (ii) project cost overrun and liabilities  arising from liquidated ascertained damages (LAD), and (iii) rising cost  of building materials.

Source: Kenanga Research - 23 May 2023

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