Suncon 'buy', Matrix 'buy', building materials 'underweight'


By AffinHwang Capital

Buy (maintain)

Target price: RM2.00

AFFINHWANG analysts believe Sunway Construction (Suncon) is more resilient than most of its peers as it is in a net cash position (RM0.25/share), has an asset-light model (not involved in the property business), integrated construction capabilities and is competitive in open tenders with its excellent track record.

Suncon has achieved its new contracts target of RM1.5bil in 2018 and expects to secure another RM1.5bil in 2019.

Its parent company, Sunway, continues to launch new property projects and expand its hospitals.

“In-house” jobs are expected to contribute about 30% of the RM1.5bil new contract target in 2019.

“We gather that Suncon is the frontrunner for the RM0.7bil Tenaga Nasional Bhd headquarters re-development project as it is currently undertaking the piling works at the site,” AffinHwang said.

Suncon has also submitted tenders for government hospital projects (no opportunities previously as open tenders were not carried out by the previous administration) and will bid for the RM5.2bil Klang Valley double-tracking packages.

The government’s review of public-sector projects will likely lead to a reduction in subcontract values and scope of works for Suncon’s RM1.2bil Klang Valley MRT Line 2 (MRT2) and RM2.2bil LRT Line 3 (LRT3) projects. Suncon is looking to complete negotiations with the main contractors of the projects by year-end on the revised contract value and designs.

“We have assumed a reduction of 23% for the MRT2 and 30% for the LRT3 contracts (total reduction of RM0.9bil) in our EPS forecasts,” analysts said.

Analysts said the construction sector outlook remains challenging but Suncon’s remaining order book of RM5.2bil provides good earnings visibility.

Suncon has started pursuing overseas projects, especially in India and South-East Asia given the slow domestic infrastructure project roll-out currently. The overseas project bids are mainly for highways and city railway projects which Suncon has extensive experience.

AffinHwang reiterated its “buy” call with RM2 target price, based on a 10% discount to RNAV.


By AllianceDBS Research


Target price: RM2.50

DESPITE Matrix Concept Holding Bhd (Matrix’s) record high property sales at its two flagship projects, Bandar Sri Sendayan (BSS) in Seremban and Bandar Sri Impian (BSI) in

Kluang, AllianceDBS analysts gave a lower EPS forecast due to, “Our more conservative property sales and margin assumptions.”

The majority of Matrix’s launches are priced below the RM600,000 per unit mark, leveraging on the robust demand for affordable homes.

The sales momentum going forward is likely to remain on the uptrend, as Matrix still has a large pipeline of affordable homes which are ready for launch.

BSS remains the jewel in its crown given the low average land cost of RM7 psf (with infrastructure in place) when its affordably-priced properties are already selling at around RM200 psf, leading to significantly higher-than-average profit margins.

Analysts believe that this unrivalled competitive advantage will make Matrix the best proxy to pure township developments, which are set to outperform in this challenging market.

AllianceDBS also stated that timely launches of its projects in the Klang Valley will be critical for boosting its earnings growth.

A potential rating catalyst would be the new air force training base at BSS is scheduled for completion by end of 2018 which will then accommodate an additional estimated 3,000 population.

While Matrix’s dividend payout policy stands at 40%, a higher payout like FY18’s 45% could help re-rate its stock price.

Analysts maintain their Buy call with a higher TP of RM2.50, based on an unchanged 30% discount to our fully-diluted RNAV of RM3.56.

Matrix is currently trading at a bargain 6x FY19 PE despite sustainable earnings visibility and decent dividend yield of around 6.5% for this township developer and key risks to AllianceDBS’ view would be the rising household debt and softer consumer sentiment which may lead to lower property sales.


By UOB Kay Hian

Underweight (downgraded)

THE sector’s outlook remains challenging, given the persistently weak local steel and cement demand amid slow construction activities for mega and infrastructure projects.

UOB Kay Hian analysts stated that steel companies’ earnings remained unexciting in its third quarter (3Q18) earnings review.

Core net earnings for Ann Joo contracted 42.4% q-o-q and 68.8% y-o-y in 3Q18 as margins were impacted by high raw material prices amid weak local demand. For Choo Bee, margins are expected to ease in 4Q18 after decent margins were recorded in 3Q18, as traders had already stocked up in 3Q18 ahead of the sales and service tax implementation.

Meanwhile for Hume, the first quarter of 2019 (1Q19) earnings remained under pressure with a net loss of RM19mil on persistently low cement.

For the steel segment, export opportunities have turned dimmer with the US-China trade tensions impacting steel consumption. The sector will continue to trade at exceptionally depressed P/B valuations in the first half of 2019 (1H19) given the lack of compelling near-term catalysts.

“We also remain cautious on a further decline in the steel segment’s utilisation rate given the entry of Alliance Steel and re-commissioning of Lion Industries’ plants,” analysts said.

UOB Kay Hian has downgraded the sector to underweight as earnings of steel and cement companies are believed to remain under pressure in the near term.

Given the less compelling industry-wide dynamics, the sector will continue to trade at exceptionally depressed P/B valuations.

For Ann Joo Resources, UOB Kay Hian believes the earnings buffer from exports has weakened recently given the fall in export prices and rising costs. The target price is based on 7x 2019F EPS of 15.8 sen at 45% dividend payout ratio which translates into a dividend yield of 7.1% for 2018. The entry price is RM1.05. Hold call is maintained.

Choo Bee Metal Industries has a TP based on 6x PE 2019F EPS of 34.3 sen. Outlook for Choo Bee remains challenging with both industry oversupply and weak demand dragging down ASP. The entry price is RM1.20. Hold call is maintained.

Hold call: UOB Kay Hian has maintained the ‘hold’ call on Ann Joo Resources.