SunCon’s recovery trajectory remains intact — Analysts
KUALA LUMPUR: Sunway Construction Bhd’s (SunCon) recovery trajectory remains intact albeit bumpy with the confluence of productivity loss from the implementation of MCO 2.0 and higher cost of materials, analysts observed.
In a report, the research team at Hong Leong Investment Bank Bhd (HLIB Research) said: “SunCon’s FY21 recovery is expected to be bumpy in the near term with a confluence of productivity loss from MCO 2.0 as well as higher materials costs.
“Nonetheless, we believe recovery trajectory remains intact.”
It noted that SunCon is maintaining its RM2 billion replenishment target in 2021 to be dominated by in-house jobs (similar to FY20).
“Some of the earmarked jobs include Sunway Valley City (RM750 million), Giza Medical Centre (RM200 million), LSS4 EPCC (RM100 million), precast (RM200 million), KLCC as well as conversion of remaining tenders of highways in India.
“We have pencilled in a conservative RM1.7 billion worth of jobs which mitigates the risk of slow conversion for external jobs,” it said. However, it pointed out that possible upside risk to this target is speedy implementation of MRT3 which might only come in 2022 at the earliest.
On the impact of MCO 2.0, HLIB Research said while all of SunCon’s sites meet KKR/ MITI’s guidelines for continued operations, on average across all its projects, productivity levels are at circa 50 per cent after a week of MCO 2.0.
“We believe sub-standard 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.
“Management 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 to be imposed ala MCO 1.0, we believe its net cash of RM318 million compared with monthly fixed costs of RM15 million is able to sustain through the period. We note that its cost structure also kept the company in the black despite a tumultuous quarter in 2Q20,” it said.
As for the cost of materials, the research team highlighted that local steel prices have increased by roughly 30 per cent (compared with 2020 average) to RM2,600 to RM2,700 range currently (MITI).
“In mitigating short term spikes in steel prices over the short term, SunCon practices a policy of locking in forward six months’ supply of steel.
“By our estimation, assuming steel prices hover at current levels for the remainder of 2021 this would represent circa 0.6 per cent contraction in its construction gross profit margin translating into FY21f earnings downside of circa seven per cent,” it added.
Meanwhile, it noted that orders from construction sites in Singapore are recovering in tandem with the sector’s recovering productivity.
“This is further sustained by consistent HDB 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. Despite a higher steel component in this division’s cost structure, its shorter term nature of contracts is a positive in the event cost pressure sustains,” it said.
It also noted that with all sites operational, SunCon meets requirements in regards to the minimum workers’ housing standards and strictly monitors its business partners for compliance.
“Thus far, no major outbreak clusters have been linked to the company. SunCon participates in various social programmes among them being funding to orphanages, housing programmes and contribution to Sunway Bhd’s social programmes,” it added.
All in, HLIB Research retained its ‘buy’ recommendation on the stock.
It said: “We believe given its impressive execution track record, SunCon is well positioned to partake in pump priming initiatives. Its healthy balance sheet with net cash position of RM0.30 per share and strong support from parent-co Sunway Bhd should provide job flow clarity during these uncertain times.”