Highest return on equity over three years: Construction: Sunway Construction Group Bhd - In position to win high-return job

This article first appeared in The Edge Malaysia Weekly, on December 14, 2020 - December 20, 2020.
Highest return on equity over three years: Construction: Sunway Construction Group Bhd - In position to win high-return job
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Being part of the Sunway group, Sunway Construction Group Bhd (SunCon) might be perceived to have a natural contract source from in-house property development projects.

However, SunCon does not depend much on its parent company to replenish its order book. In-house construction jobs make up only roughly 30% of its outstanding contracts.

Its largest shareholder is Sunway Bhd via Sunway Holdings Sdn Bhd, with a 54.56% stake. Meanwhile, Sungei Way Corp Sdn Bhd, which holds a 10.08% stake in SunCon, controls a 51.36% equity interest in Sunway Bhd.

SunCon does not count on its parent company for construction works mainly because the group is capable of doing more complex engineering and construction services. As such, it could secure jobs that offer a wider margin by leveraging technology such as computer virtual design simulation.

In an interview with The Edge in February, Sunway Group president Datuk Chew Chee Kin said many internal jobs did not go to SunCon because the margins tend to be low. The group will award jobs to SunCon only if the subsidiary does not have enough jobs in hand.

In the three-year period between the financial years ended Dec 31, 2017 (FY2017) and FY2019, SunCon’s profit after tax and minority interest were on the growth path, expanding from RM124 million in FY2016 to RM132 million in FY2017 and RM145 million in FY2018. It dipped to RM129 million in FY2019, but it was still above the level in FY2016.

The group’s earnings performance translated into an adjusted weighted return on equity (ROE) of 23.4%. The high ROE has won SunCon The Edge Billion Ringgit Club award for the highest ROE over the last three years for the construction industry.

SunCon has been able to meet its target of securing RM2 billion worth of jobs this year even though the Covid-19 pandemic has ruined global economic growth.

Major new contracts secured by SunCon include the construction of the Thorapalli Agraharam–Jittandahalli highway in India worth RM508 million and a three-block residential condominium awarded by Sunway Belfield Sdn Bhd worth RM403 million.

The new contracts brought its outstanding order book to RM6.4 billion.

Since SunCon has been able to meet its FY2020 job replenishment target by September, it will be no surprise if the group exceeds the target by year-end. It has the capacity to sign up contracts worth RM2.2 billion to RM2.5 billion a year.

“Note that the group has clinched its eighth highway project in India in 1QFY2020, worth about RM508 million. We do not discount the possibility of winning more construction projects from India in 4QCY2020,” says MIDF Research analyst Khoo Zhen Ye.

Given the country’s unprecedented nationwide Movement Control Order (MCO), which halted construction jobs for 2½ months, it might be a challenge for SunCon to maintain its ROE above 20% in 2020. The earnings disruption is already reflected in its financial results for 2QFY2020.

Its net profits plunged to RM2.2 million in 2QFY2020 from RM33.2 million in the previous corresponding quarter. This led to a 71% drop in SunCon’s net profits for the first six-month period ended June 30, 2020 to RM18.5 million. Revenue shrank 43% to RM506 million, from RM880.2 million in the previous corresponding period.

Nevertheless, the high job replenishment rate and tender book have kept analysts bullish on SunCon’s prospects. MIDF’s Khoo has a “buy” call on SunCon, with a target price of RM2.14; and Hong Leong Investment Bank Research analyst Jeremy Goh pegs the target price at RM2.08.