KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings rebounded strongly on a sequential basis to RM31.9m on higher progress billing
• As expected, 9MFY20 normalised earnings came in -43.9%yoy lower at RM54.2m, impacted by the pandemic
• Solid order book of about RM5.3b which translates into earnings visibility for the next three years
• A potential major beneficiary of the impending resumption of mega public transport infrastructure projects in FY21
• Maintain BUY with an unchanged target price at RM2.14

Strong sequential rebound in earnings. Sunway Construction Group Berhad (SCGB)’s 3QFY20 normalised earnings improved almost sevenfold to RM31.9m from RM4.7m as at 2QFY20, primarily driven by the prompt resumption of the construction activities which led to higher progress billings. On a year-on-year basis, it was lower by -12.6%yoy which we considered as commendable given the existing Covid-19 standard operating procedures (SOPs) in place at work sites. Cumulatively, the group’s 9MFY20 normalised earnings was lower by - 43.9%yoy to RM54.2m which came in within our and consensus’s expectation, accounting for 72.3% and 71.2% of the full year estimates respectively (refer to Table 1). Moving forward, we expect SCGB’s construction and business activities to continue to pick up pace in 4QFY20 as work site operations remain unaffected by the CMCO.

Construction division remains resilient. The group managed to record higher construction revenue of RM403.4m (+10.5%yoy) in 3QFY20. This was mainly attributable to the ramping up of the construction progress for the TNB Bangsar project in spite of the existing Covid-19 restrictions in place, enabling the group to post a profit before tax (PBT) of RM34.8m (-1.7%yoy) in the quarter-under-review. As a result, this has contributed to a resilient PBT for 9MFY20 (Table 1) albeit with a lower PBT margin of 7% (-2.9ppt yoy) possibly due to higher Covid-19 related costs incurred. We opine that the group’s construction division is on track to achieve a stronger earnings recovery as the operations resumed to almost pre-pandemic level.

A well-balanced job portfolio to support earnings growth momentum. We believe that the group’s current outstanding order book stands at about RM5.3b which will translate to a strong earnings visibility over the next three years. Meanwhile, we remain positive on the group’s ability to replenish its order book in FY21 premised on the group ability to exceed its FY20 target (i.e. RM2.0b) to RM2.3b, after gaining the two major highway projects clinched in India worth a total of RM823.0m and sizeable in-house projects. Thus, we opine that this showcase the group’s capability and strong track record in securing major overseas contracts. The prospects for the group’s job replenishment rate remain bright in view of its outstanding tender book of about RM5.3b with more than half from abroad (i.e. India, Singapore and Philippines), as part of its overseas expansion strategy. While at the domestic front, the continuation of mega public infrastructure projects as announced in Budget 2021 to bode well for the group.

On the precast segment, we posit that the additional demand for Build-To-Order (BTO) flats to 16-17k in FY20 in Singapore would also continue to support the earnings from this segment. As at 30 Sept 2020, the group’s jobs were all approved by the Singapore government to be recommenced, enabling it to gradually recover in 4QFY20. On a year-to-date basis, a total of 16.7k BTO flats have been launched. Note that Singapore’s HDB flats account for >90% of the group’s precast segment sales.

Earnings estimates. We are maintaining our earnings forecasts.

Target price. We are maintaining our TP of RM2.14 by pegging an unchanged PER of 18.0x to the group’s FY21 EPS of 11.9sen. Note that the target PER is +1.5SD premium above the group’s two-year historical average. We opine that the premium is justified given the group’s solid order book replenishment rate, sound balance sheet and continued job flows from its parent company.

Maintain BUY. We remain sanguine on the group’s defensive and quality earnings outlook, predicating on its strong current outstanding order book and prompt resumption of work operations as reflected in its strong rebound in earnings in 3QFY20. The defensive nature of the group is underpinned by its well-balanced order book portfolio which made up of its sizeable in-house projects and overseas job wins, especially from India whereby the group has clinched two major highways in FY20. This will bode well with the group’s earnings momentum from FY21 onwards. Thus, we expect that the group’s revenue and earnings prospects remain healthy in anticipation of recovery from 4QFY20 onwards. Coupled with its focus for overseas expansion drive, we remain optimistic on the group’s prospects as its job replenishments rate remains bright moving into FY21. On the intermediate term, the group’s prospect is also well-supported by its strong outstanding order book of about RM5.3b which will provide earnings visibility over the next three years. Notably, we posit that SCGB could be one of the main beneficiaries from the impending continuation of the mega public transport infrastructure projects (i.e. MRT3, KL-SG HSR, JB-SG RTS, ECRL) as announced in Budget 2021. This is premised on the group’s strong track record and vast experience in railway projects as well as the proximity of its two pre-cast concrete manufacturing plants in Johor. All factors considered, we reiterate our BUY recommendation on SCGB.

Source: MIDF Research - 20 Nov 2020