Comprehensive Analysis of Sunway Construction Group

Broker: UOB Kay Hian | Date: November 22, 2024

Overview of Sunway Construction Group

Sunway Construction Group Berhad (SCGB MK) is a leading construction company in Malaysia, renowned for its substantial contributions to the industrial sector. The report explores the company’s financial performance, strategic initiatives, and future expectations in the construction domain. With a market capitalization of RM5,711.9m (US\$1,279.8m), Sunway Construction remains a pivotal player in Malaysia’s construction landscape.

Stock Performance and Valuation

The company’s stock is currently priced at RM4.43, with a target price set at RM4.54, indicating a potential upside of 2.5%. The stock’s 52-week high and low are recorded at RM5.13 and RM1.72 respectively, reflecting significant volatility in the market. Despite the fluctuations, major stakeholders, including Sunway Holdings Sdn Bhd and Sungei Way Corp Sdn Bhd, maintain substantial shares in the company.

3Q24 Financial Results: A Mixed Bag

Sunway Construction’s third-quarter earnings for 2024 fell short of expectations, primarily due to slower-than-anticipated progress billings of data center (DC) projects and conservative margin recognition. Key financials for 3Q24 reveal a revenue of RM865.3 million, marking a 32.9% increase quarter-on-quarter (qoq) and a 28.5% rise year-on-year (yoy). However, the core PATAMI stood at RM34.2 million, showing a decline of 8.0% qoq and 9.7% yoy.

Segmental Performance

Construction Segment

The construction division exhibited a notable improvement in progress billing, with operating profit surging to RM60.2 million, a 29% increase qoq and a 35% rise yoy. This growth was driven by accelerated progress in DC projects, particularly in Sedenak Tech Park, Johor. Despite these gains, the EBIT margins slightly contracted qoq by 0.7%, attributed to cautious profit recognition for projects in their early stages and increased building material costs.

Precast Segment

The precast segment experienced a downturn, with revenue plummeting to RM33.5 million, a significant drop of 38% qoq and 60% yoy. This decline reflects reduced contributions from Integrated Construction & Prefabrication Hub (ICPH) projects. Despite a slight improvement in margins, EBIT fell to RM4.6 million, down 25% qoq and 51% yoy. The segment’s future hinges on the launch of Singapore’s Housing and Development Board (HDB) flats, a major revenue driver.

Strategic Outlook and Orderbook Replenishment

Sunway Construction’s robust orderbook replenishment remains a key strength, with year-to-date (ytd) new job wins amounting to approximately RM4.1 billion. This includes the upsizing of its DC project in Sedenak Tech Park. The company is well-positioned for future contract wins, with notable projects in the pipeline such as the Penang Light Rail Transit and additional internal projects from Sunway Berhad.

Earnings Revision and Valuation

The company’s 2024-25 net profit forecasts have been adjusted downward by 11% and 7%, respectively, due to slower progress billing and margin recognition. The recommendation remains a “HOLD” with a revised target price of RM4.54, as current valuations have absorbed most positives. The target price implies a 21x 2025F PE, aligning with the company’s historical performance.

Environmental, Social, and Governance (ESG) Considerations

Sunway Construction is committed to mitigating environmental impacts, engaging with local communities, and maintaining robust governance practices. The board comprises a majority of independent directors, underscoring its commitment to governance excellence.

Conclusion

Sunway Construction Group continues to navigate the challenges of the construction industry with strategic foresight and operational resilience. Its robust orderbook and strategic positioning in the DC space provide a strong foundation for future growth, despite current financial headwinds. Investors are advised to maintain a cautious stance given the current valuation and market dynamics.