• Sunway Construction’s (SunCon) core earnings grew 22% yoy to RM20.3m in 1Q21 as Movement Control Order (MCO) 2.0 was not as disruptive as MCO 1.0

• New contract wins of RM462m YTD are on track to meet its RM2bn target for 2021. Precast concrete revenue and profit margin improved in 1Q21 but rising steel prices will likely erode profit margins in subsequent quarters

• We cut our core EPS by 5-14% in 2021-23E to reflect lower revenue and profit margins due to MCO disruptions and higher steel costs. We reiterate our BUY call with a lower 12-month RNAV-based target price (TP) of RM2.18

Below Expectations

The core net profit of RM20.3m (+22% yoy) in 1Q21 comprises 15% of the consensus full-year forecast of RM139.8m and 17% of our previous estimate of RM121.5m. Revenue and PBT margin were below our expectations due to operational disruptions caused by MCO 2.0 and higher steel costs. Core earnings fell 46% qoq in 1Q21 due to the one-off final settlement for its Uttar Pradesh project in India recognised in 4Q20.

Higher Revenue and Earnings in 1Q21

Revenue jumped 24% yoy to RM455.2m in 1Q21, mainly driven by higher construction revenue (+28% yoy). Pre-cast concrete revenue contracted 6% yoy due to the schedule of delivery to projects, which is expected to pick up in subsequent quarters. Group PBT surged 26% yoy to RM26m in 1Q21 on the back of the higher revenue. Construction PBT increased 14% yoy in 1Q21, but construction PBT margin was lower at 5.6% in 1Q21 compared to 6.2% in 1Q20 due to relatively lower profit margins for new projects secured in 2020, given the competitive construction landscape. Precast concrete PBT jumped 368% yoy in 1Q21 on higher revenue and a PBT margin of 10.8% compared to 2.1% in 1Q20.

Good Prospects to Replenish Order Book

SunCon’s high remaining order book of RM5bn will support earnings growth in 2021-23E, and it has good prospects of replenishing its order book with RM7bn of tenders submitted for new projects (50% overseas). Potential hospital and commercial projects worth RM0.7bn could be secured from its parent Sunway this year.

Maintain BUY Call With a Lower TP of RM2.18

We gather that the steel cost has jumped 33% yoy in 4M21, putting pressure on the profit margin. Given this and the MCO disruptions, we cut core EPS by 5-14% in 2021-23E. We maintain our BUY call with our RNAV-based TP trimmed to RM2.18 from RM2.22 to reflect lower valuation for its pre-cast concrete segment (reduced sustainable earnings). Key risks: a slow roll-out of infrastructure projects and higher building material costs.

Source: Affin Hwang Research - 21 May 2021