• Downgrade to HOLD (TP: RM3.90). Sunway Construction (SunCon) reported 1H24 Core Net Profit of RM71.3mn (+17.2% YoY), which fell short of both ours and consensus estimates, achieving 39.9% and 39.4% respectively. The earnings shortfall relative to our forecast was due to our aggressive assumption on the timing of earnings recognition. Hence, we lowered our earnings forecasts for FY24F-26F by 7.0%-12.1%, reflecting a more conservative outlook. SunCon has declared a dividend of 3.5sen and we anticipated total FY24F DPS of 6.5sen, translating to a 1.5% dividend yield. We downgrade SunCon to a HOLD with a revised TP of RM3.90 (from RM4.01), based on FY25F EPS of 17.2sen, pegged to +0.5SD average 5-years PER of 22.7x.

• Key highlights. In 2QFY24, SunCon posted a 7.7% QoQ revenue increase, with net profit jumping 43.9% QoQ, primarily due to the progress in its building and data center projects. Currently the company is working on five data centre projects from four different MNCs. Meanwhile, the precast segment experienced a 12.4% revenue decline, mainly due to delayed productions which scheduled to begin only in the final quarter of this year and early next year. Hence, we anticipate for slower earnings contribution from this segment for FY24.

• Earnings Revision. We cut our earnings forecasts for FY24F/25F/26F by 12.1%/8.8%/7.0% (refer to Table 2) as we adjusted lower our progress billings assumptions.

• Outlook. We remain sanguine on SunCon’s outlook driven by its active participation in tenders within the warehousing and semiconductor manufacturing, and the expected opportunities from major infra projects namely the Penang LRT and Penang International Airport expansion. Currently, SunCon’s outstanding orderbook stood at RM7.4bn and the company has raised its new orderbook win target to RM5.0bn from RM4.0bn. We believe this is achievable supported by in-house pipeline projects from Sunway Berhad, especially those involving special purpose buildings. Furthermore, the anticipated first annuity from one of its India highway projects by 3Q24 could help to bolster its financial position. Potential downside risks include: 1) further setbacks in infrastructure project schedules; 2) continued delays in payment receipts, which may hinder the ability to undertake new projects; and 3) adverse shifts in building material costs.

Source: BIMB Securities Research - 23 Aug 2024