Sunway Construction’s recovery expected to be bumpy


SUNWAY Construction Group Bhd’s recovery trajectory is expected to remain intact in the near term despite productivity loss from the second Movement Control Order (MCO).

Hong Leong Investment Bank Bhd research analyst Jeremy Goh said the company’s management is aiming for RM2 billion worth of jobs this year with internal jobs forming the bulk of that figure.

“While all of Sunway’s sites meet the Works Ministry and International Trade and Industry Ministry’s guidelines for continued operations, we gather that on average across all its projects, productivity levels are at circa 50% after a week of MCO 2.0.

“We believe substandard productivity levels are largely from its building jobs given extra housing arrangements needed on the part of their business partners compounded by scaled-down operations,” he stated in a note yesterday.

The investment bank maintained its ‘Buy’ rating on the company with a lower target price of RM2.01 post-earnings adjustment.

“We believe given its impressive execution track record, Sunway Construction is well positioned to partake in pump-priming initiatives. “Its healthy balance sheet with net cash position of 30 sen per share and strong support from parent company, Sunway Bhd, should provide job flow clarity during these uncertain times,” Goh said.

He said the management of Sunway Construction believes that in the case of an extended MCO, productivity levels would continue to improve as the company and its business partners adjust.

“In the case of a strict lockdown à la the first MCO, we believe its net cash of RM318 million versus monthly fixed costs of RM15 million is able to sustain through the period.

“We note its cost structure also kept the company in the black despite a tumultuous second quarter of 2020,” he said.

The company had also won in-house jobs to maintain its RM2 billion replenishment target in 2021, with its earmarked jobs including Sunway Valley City and Giza Medical Centre totalling up to RM1.25 billion, as well as conversion of remaining tenders of high- ways in India.

The investment bank has pencilled in a conservative RM1.7 billion worth of jobs which helps mitigate the risk of slow conversion for external jobs.

“Possible upside risk to this target is a speedy implementation of Mass Rapid Transit 3 which we reckon may only come in 2022 at the earliest,” Goh noted.

He said orders from construction sites in Singapore for the group’s precast segment are recovering in tandem with the sector’s recovering productivity.

“This is further sustained by consistent Housing and Development Board launches in Singapore despite the pandemic. Launches slated for 2021 should fall in the 17,000 range similar to levels seen in 2019 and 2020,” he said.

Goh added that despite a higher steel component in this division’s cost structure, the shorter-term nature of contracts is a positive in the event cost pressure sustains.

“Local steel prices have increased by roughly 30% versus the 2020 average of RM2,600 to the RM2,700 range currently.

“In mitigating short-term spikes in steel prices, Sunway Construction practices a policy of locking in forward six months’ supply of steel,” he said.

The bank estimates, assuming steel prices hover at current levels for the remainder of 2021, this would represent around 0.6% contraction in its construction gross profit margin translating into its financial year 2021 earnings with a downside of around 7%.