Sunway Construction Group Bhd’s (SunCon) results disappointed due to a slower-than-expected pick-up in its construction work progress and weaker margins, yet Kenanga Research remains upbeat on the impending roll-out of key public infrastructure projects.
In its Results note today (Nov 22), the research house cuts its FY23F and FY24 earnings by 7% and 6%, respectively to account for lower revenue and margin assumptions as key new projects are still at initial construction stages as mentioned above.
It also maintains its OUTPERFORM call and trims its TP by 5% to RM2.26 from RM2.39 based on unchanged 18x FY24F PER, which is in-line with our valuation for big cap construction companies such as Gamuda Bhd (OP; TP: RM5.45) and IJM Corporation Bhd (OP; TP: RM2.15).
“Our TP also includes a 5% premium to reflect a 4-star ESG rating as appraised by us,” it said.
Kenanga said SunCon’s 9MFY23 core profit of RM96.1m missed expectations at only 66% and 68% of its full-year forecast and the full-year consensus estimate, respectively.
“The variance against our forecast came largely from a slower-than-expected pickup in its construction work progress and weaker margins. No dividend was declared as expected as it usually pays half-yearly dividend, historically,” it said.
However, the research house expects a significant revitalisation of the construction sector in 2024 backed by the roll-out of the RM45 billion MRT3 project, RM9.5 billion Bayan Lepas LRT and six flood mitigation projects reportedly to be worth RM13 billion.
“It will also be boosted by vibrant private sector construction market, underpinned by massive investment in new semiconductor foundries and data centres.
“SunCon is eyeing opportunities in data centre building jobs, MRT3 and Bayan Lepas LRT work packages and contracts from parent and sister companies,” it added.
“We like the group for its strong job prospects of the sector as a whole with the imminent roll-out of key public infrastructure projects, its
strong earnings visibility underpinned by RM5.79 billion outstanding order book and recurring jobs from parent and sister companies, as well as its extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works.
The risks to Kenanga’s call include weak flows of construction jobs from public and private sectors, project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and rising cost of building materials.
