SUNWAY Construction Group Bhd may very well emerge as an early winner should a more bullish scenario unfold for the construction sector, according to RHB Investment Bank, based on an optimism for the group’s resilience and earnings recovery.
“We remain optimistic on its earnings recovery, supported by its strength in work execution, aggressive tendering, and a steady flow of jobs from its parent company,” said RHB analysts Muhammad Danial Abd Razak and Eddy Do.
At the same time, the analysts also noted that the price of SunCon’s shares have also retraced ahead of the group’s results announcement for the second quarter of its 2020 financial year ended June 30, which presents a more favourable entry point.
The analysts also expect to see a weaker set of numbers, which will likely be the lowest since its listing, due to the activities that were halted during the movement control order (MCO) before the partial reopening in May.
“This largely took place in 2Q2020, thereby affecting the group’s income. We believe SunCon will likely report a small net profit of RM2 mil to RM6 mil for the quarter,” said the analysts.
It was also noted that SunCon’s outstanding order book is at an estimated RM5.46 bil, after deductions for work recognition in the quarter just ended. This, according to the analysts, implies three years of earnings visibility.
As such, the duo cut their FY2020 forecast net profit by 14%, but maintain their FY21 and FY22 estimates, with the expectation that earnings should normalise by then.
“In Malaysia, construction activities have resumed to a pace that mirrors the pre-MCO period. However, progress is still rather slow in Singapore, although this is anticipated to improve by the end of the year,” said the analysts.
The analysts also expect capital expenditure to surge in FY21 from an expected low base in FY2020. At the same time, SunCon is also building a precast plant in Singapore, which is on track for completion by FY21.
“Due to these circumstances, we believe capex may surge next year, as the company will need to fund this maiden operation in FY22,” said the analysts.
The downside risks to this stock include a failure to secure new contracts, and prolonged downturns in the retail and property markets.
RHB upgraded the stock to a buy call from a previous neutral call, with an unchanged target price of RM2.14.
At 4pm, SunCon’s shares were last done at RM1.80, down a sen, with 45,400 shares traded. – Aug 14, 2020
