This article first appeared in The Edge Financial Daily on February 15, 2019
Sunway Construction Group Bhd
(Feb 14, RM1.55)
Maintain buy with a target price of RM2.12: Sunway Construction Group Bhd (SunCon) remains our top pick for exposure to the construction sector. The company’s RM1.5 billion new order target for financial year 2019 (FY19) is reasonable, in our view, as it has submitted tenders for several private sector building jobs. A return of public sector projects, where it is well positioned to benefit, could provide further catalyst to the stock. In addition, sentiment for the overall sector followed by a rerating in price-earnings multiples could materialise if megaprojects are reintroduced. The company’s balance sheet remains healthy with a net cash of RM325 million, despite media reports of slowing payments.
We anticipate SunCon to report earnings of RM35 million to RM40 million for the fourth quarter of FY18 (4QFY18), flat on a quarter-on-quarter basis but an improvement on a year-on-year (y-o-y) basis. If this materialises, full-year earnings could come in at RM143 million to RM148 million, compared to our forecast of RM147 million (earnings growth of 6.7% y-o-y). In FY18, it met its RM1.5 billion target for new construction orders (outstanding order book: RM5.3 billion), bucking the trend of a slowdown in the sector.
According to MRT Corp, the project owner of the mass rapid transit Line 2 (MRT2) project, overall construction progress stood at 42.6% as at mid-January 2019 (from 37% as at end-October 2018). The updates by MRT Corp indicate that works are progressing smoothly, at a pace of five percentage points over the three-month period. This matches SunCon’s five-percentage-point advancement of works in 3QFY18 for the project, suggesting that progress is well on track.
SunCon’s RM2.2 billion light rail transit Line 3 (LRT3) package is the largest among subcontractors, and has barely been reflected in past quarters, with progress at only 5% or RM157 million booked as at 3QFY18. We gather that works for LRT3 are ongoing despite delays in executing new contracts. This should provide some support to 4QFY18 earnings. Looking ahead, in order to meet its new 2024 deadline, works have to progress at a pace of 15 percentage points per year, which equates to RM300 million (14% of FY19 forecast revenue) in billings per year for FY19-FY24, partly explaining our 11% y-o-y earnings growth for FY19.
According to our estimates, more than 60% of SunCon’s cost of goods sold comprises steel bars and ready-mixed concrete. Steel bar prices fell to RM2,100 to RM2,250 per tonne, a decline of over 20% y-o-y from RM2,700 to RM2,850 per tonne as at early-2018, while ready-mixed concrete prices have fallen substantially as well. In our view, the drop in raw material prices, if held steady, would be enough to offset potential margin compression arising from project cost rationalisation. — RHB Research, Feb 14