This article first appeared in The Edge Financial Daily on February 24, 2020

Sunway Construction Group Bhd
(Feb 21, RM1.95)
Upgrade to outperform with a higher target price (TP) of RM2.15: Sunway Construction Group Bhd’s (SunCon) financial year ended Dec 31,2019 (FY19) core net profit (CNP) of RM129.3 million (-10.5% year-on-year [y-o-y]) accounted for 105%/98% of our/consensus estimates with top line declining 21.6% y-o-y to RM1.8 billion. Overall earnings fell as the group’s performance was dragged by lower net profit contribution of RM125.9 million (-12.1% y-o-y) from the construction division. Meanwhile, the precast concrete segment contributed net profit of RM3.4 million for FY19 (up from RM1.1 million for FY18). It declared dividend per share (DPS) of 3.5 sen, taking full-year DPS to seven sen.

Its fourth quarter of financial year ended Dec 31, 2019 (4QFY19) CNP came in at RM31.6 million (-5.6% quarter-on-quarter [q-o-q]/-13.3% y-o-y) on the back of a turnover of RM485.9 million (+20.7% q-o-q/-22.4% y-o-y). In terms of segmental breakdown, for the final quarter: i) the construction division posted a net profit of RM28 million (-17.2% q-o-q /-27.1% y-o-y); and ii) the precast concrete business contributed net profit of RM3.7 million, turning around from net losses of RM300,000 for 3QFY19 and RM1.9 million for 4QFY18.

On the margin front, pre-tax profit margin stood at 8.6% for 4QFY19 (versus 9.7% for 3QFY19 and 8.4% for 4QFY18) for the construction division, bringing full-year margin to 9.6% (from 8.6% the year before). Precast concrete division’s pre-tax profit margin also rose, to 1.8% for FY19 from 0.7% for FY18. As of end-December last year, the group was in a net cash position of RM407 million (or 32 sen per share).

SunCon secured new contracts totalling RM1.8 billion for FY19 (versus RM1.6 billion for FY18). This has lifted outstanding order book to RM5.2 billion as of end-December 2019, which will underpin forward earnings and represents 3.2 times last year’s construction revenue. The group is targeting an order book replenishment of RM2 billion for FY20 (which is also our new contract wins assumption). We have revised up our net profit forecast to RM169 million (+7.6%) for FY20 and RM176 million for FY21 after assuming slightly stronger margins and better contributions from the precast concrete segment.

Applying a higher price-earnings ratio multiple of 16.5 times (which is pegged at +1 standard deviation above its three-year mean) on a stronger earnings base, we have upped our TP from RM1.45 to RM2.15. With potential total returns of 13.3%, we also upgrade our call on SunCon to “outperform”.

Risks to our call include: i) lower-than-expected margins/order book replenishment; and ii) delays in construction progress. — Kenanga Research, Feb 21