Kenanga Research & Investment

Sunway Construction Group - Fundamentals Priced in

Publish date: Tue, 21 May 2024, 10:38 AM

SUNCON’s 1QFY24 result met expectations. Its 1QFY24 core net profit grew only 4% YoY, weighed down by funding cost for its projects in India. Its prospects remain strong underpinned by a record order backlog and the roll-out of mega public infrastructure projects locally. We maintain our forecasts and TP of RM3.16 but downgrade our call to MARKET PERFORM from OUTPERFORM as the stock is fairly valued after the strong run-up in its share price.

SUNCON’s 1QFY24 core profit of RM27.0m came in at only 16% and 15% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectations as we expect strong quarters ahead as progress billings accelerate. No dividend was declared as expected as it usually pays half-yearly dividend historically.

YoY, its 1QFY24 revenue rose 16% driven by higher billings in newer projects However, its core profit grew by a slower 4% largely on the doubling of its finance cost, largely to fund its projects in India.

QoQ, its 1QFY24 revenue declined 31% from a high base in the previous quarter (due to lumpy billings from certain building and renewable energy projects.) Its 1QFY24 core profit contracted by a sharper 51% due to higher finance cost.

Outlook. We expect a significant revitalisation of the construction sector in 2024 backed by: (i) the roll-out of the RM45b MRT3 project, RM9.5b Bayan Lepas LRT and several flood mitigation projects reportedly to be worth RM13b, and (ii) a vibrant private sector construction market, backed by massive investment in new semiconductor foundries and data centres. SUNCON is eyeing opportunities in data centre building jobs, MRT3 and Penang LRT Mutiara Line work packages, and contracts from parent and sister companies.

Forecasts. Maintained. We assume annual job wins of RM3.5b.

Valuations. We maintain our TP of RM3.16 based on 18x FY25F PER, which is in-line with our valuation for big cap construction companies, i.e. GAMUDA (OP; TP: RM6.20) and IJM (OP; TP: RM2.54). Our TP also includes a 5% premium to reflect a 4-star ESG rating as appraised by us (see Page 5).

Investment case. We like SUNCON for: (i) strong job prospects of the sector as a whole with the imminent roll-out of key public infrastructure projects, (ii) its strong earnings visibility underpinned by RM6.3b outstanding order book and recurring jobs from parent and sister companies, and (iii) its extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works. However, the stock is fairly valued after the strong run-up in its share price. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our recommendation include: (i) 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 - 21 May 2024

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