Investment Highlights

• We maintain BUY on Sunway Construction (SunCon) with a higher fair value (FV) of RM3.59/share (from RM2.66/share previously) on raised earnings forecast and rolled-forward FY25F P/E of 20x, at parity to its 3-year average. We also ascribe a 3% premium to reflect our 4-star ESG rating.

• We increased FY24F-FY25F earnings by 8%-18% on higher order book and expanded margin assumptions as SunCon’s FY23 core net profit (CNP) of RM171mil (excluding RM26mil exceptional items, mainly from impairment loss allowance for receivables) exceeded expectations, coming in 22%-24% above our and consensus estimates. Likewise, SunCon has declared a DPS of 3 sen for 4QFY23, bringing FY23 total DPS to 6 sen (+9% YoY), above expectations.

• FY23 CNP rose 31% YoY mainly due to the precast concrete segment with the division’s pretax profit surging 75% from new projects, increased production at its integrated construction and prefabrication hub (ICPH) in Johor coupled with improved margins. This was partly offset by a mild 2% contraction in construction pretax profit as margin declined by 1.7%-point to 7.1% due to the previous year benefiting from the finalisation of some projects.

• 4QFY23 core net profit (CNP) doubled sequentially to RM75mil mainly from increased construction progress (+33%) underpinned by multiple sustainable energy projects and 1.2%- point improvement in precast concrete margin to 9% in tandem with reversals of provision for completed projects.

• FY23 order book wins of RM2.5bil drove SunCon’s order book increment of 3% QoQ to RM5.3bil (Construction: RM4.8bil; Precast: RM0.5bil) - 1.2x FY24F revenue. The order book could be substantively raised if SunCon wins either a portion of the MRT3 project or finalises the Vietnam coal-fired power plant contract (SunCon’s portion amounts to RM6bil).

• Aside from the MRT3 and Vietnam coal-fired power plant projects, potential jobs may arise from construction of data centres, warehouses and internal jobs from companies within the Sunway Group, especially medical centres. We believe SunCon has tendered for multiple data centre jobs which would increase its order book by RM3bil-4bil. For the precast segment, prospects are bullish for ICPH given the 22,780 build- to-order flats launched in 2023 and another 19,600 units this year by the Housing and Development Board in Singapore.

• The stock currently trades at a FY25F PE of 15x, below its 3- year average of 20x with a decent dividend yield of 3%. Risks to SunCon include (i) lower margins due to higher-than- expected building material costs, (ii) slower-than-expected recovery in job flows; and (iii) shelving of mega projects.

Source: AmInvest Research - 21 Feb 2024