• Maintain BUY and MYR1.93 TP, 22% upside with c.4% yield. Sunway Construction’s 1Q22 core net profit met our and Street expectations – accounting for 25% and 26% of full-year forecasts. Looking ahead, we expect it to be a frontrunner for the job involving the elevated works portion of Mass Rapid Transit 3 (MRT3), as its lean balance sheet still allows it to take on large projects. Aside from that, its listed parent should continue to support earnings visibility – 48% of its orderbook comes from internal building contracts from its parent company.

• Results review. SunCon reported stronger 1Q22 core earnings of MYR34.9m (+83.5% YoY), underpinned by the 37.2% YoY growth in revenue to MYR624.7m (1Q21: MYR455.2m). This was achieved despite the 35% YoY rise in the cost of sales. Its construction segment’s PBT surged by 95% YoY, amid the impact of the MCO in 1Q21, in addition to the finalisation of accounts for completed projects. Meanwhile, its precast segment booked a 71.4% YoY decline in PBT during the quarter, despite a 8.9% YoY revenue growth due to the impact of higher steel bar prices.

• Update on orderbook. SunCon’s outstanding construction orderbook stood at MYR4.4bn as at end-1Q22 (end-4Q21: MYR4.8bn) – which should support earnings visibility well into FY24. YTD new job wins stand at MYR266m, which involves electrical fit-out works for Menara Merdeka 118 and piling works for the Light Rapid Transit 3 (LRT3) project, among others. Although this is behind our job replenishment target of MYR1.5bn for FY22, we believe that the group stands a high chance of winning jobs from the MRT3 project – given its previous track record under MRT2, with a cumulative contract value of MYR1.4bn.

• We make no change to our earnings forecasts, as results are within expectations. While rising building material costs remains an issue, we think SunCon will be able to weather the impact as it negotiates with its suppliers. We only expect its EBIT margin to reach 7.6% in FY22 (FY21: 8.2%), which is within management’s guidance of 5-8%. Our target P/E of 15.5x, pegged to our FY23F EPS, remains unchanged. The valuation target is fair, in our view, as it has imputed SunCon’s high likelihood of securing MRT3 jobs. The target P/E is above the KLCON’s index forward P/E of 12.8x, considering SunCon’s sturdy orderbook/revenue cover of c.2.8x, backed by a robust balance sheet with a manageable net debt-to-equity ratio 0.17x as of end-1Q22. All in, our TP of MYR1.93 remains unchanged, after imputing a 4% premium to our intrinsic valuation, based on our proprietary ESG scoring methodology.

• Key downside risks include project delays and prolonged high material costs.

Source: RHB Research - 26 May 2022