Investment Highlights

• We maintain HOLD on Sunway Construction (SunCon) with unchanged fair value (FV) of RM1.69/share based on 14x FY23F PE, in line with our benchmark for large-cap construction stocks. We also ascribe a 3% premium to reflect our 4-star ESG rating.

• SunCon’s core net profit of RM151mil in 1QFY22 was within expectations, accounting for 24% of our FY22F earnings and 27% of consensus estimates. We make no changes to our FY22F–24F earnings.

• 1QFY22 core net profit improved 74% YoY to RM35.5mil due to higher contribution from the construction segment (+96% YoY) which more than offset lower earnings from the precast segment (-72% YoY). The higher contribution from was supported by the resumption of economic activities after Covid-19 lockdowns and higher margins from completed projects. On the other hand, earnings from the precast segment was weak due to higher steel bar prices.

• Core net profit decreased 62% QoQ to RM35.5mil in1QFY22 due to the recalibration of margins for certain construction projects which are nearing completion and have certainty of better margin in the preceding quarter (-48% QoQ) and lower contribution from the precast segment due to higher steel bar prices (-56% QOQ).

• SunCon’s internal target of job wins (including the supply of precast products) is RM2bil in FY22F. So far, SunCon has won new projects worth RM266mil, bringing its total outstanding order book to RM4.4bil (construction RM3.9bil; precast RM0.6bil), which translates to 2.6x on FY21 revenue. Notable job wins include the RTS Link Package P2A worth RM112mil which will last till 2QFY25.

• Despite achieving only 13% of its targeted job wins, we maintain our overall order book replenishment assumption of RM1.7bil annually in FY22–24F. We believe that SunCon is a strong contender for infrastructure projects moving forward given its proven ability to compete under open bidding and strong balance sheet. Potential replenishment includes internal building jobs from its parent and sister companies under the Sunway Group and the above-ground portion of the MRT3 in 4QFY22.

• SunCon is aiming for the elevated portions for the MRT3, which include Civil Package 1 (6km elevated section and main depot) and Civil Package 2 (27km elevated and 1.2km ground tunnel), with greater emphasis on the latter. We estimate RM1.8bil jobs for Civil Package 1 and RM9.6bil jobs for Civil Package 2, which could be awarded in 4QFY22. If there are no delays in the land acquisition and sukuk issuance by MRT Corp to fund the project, advanced works could commence as early as 1QFY23.

• Meanwhile, steel prices remain high at RM3,600/tonne in May 2022, exceeding the previous peak of RM3,300/tonne. We expect steel prices to be elevated given the prolonged Ukraine-Russia war.

• Challenges faced by SunCon are: (i) rising building material costs led by an escalation/prolonged Ukraine-Russia war; and ii) delays or shelving of mega projects.

• We view the stock as fairly valued with limited upside at forward PE of 13x–14x.

Source: AmInvest Research - 26 May 2022