• 3Q23 results showed significant improvement yoy and qoq, and met expectations. Key highlight was the sharp uptick in 3Q23 precast margin.

• All eyes still on the award of Song Hau 2 Vietnam power plant project.

• Reiterate Add and TP of RM2.14 based on SOP.

3Q23 Results in Line; Strong Recovery During the Quarter

• Sunway Construction (Suncon) today (21 Nov) announced 3Q23 core net profit of RM38m (+54% yoy, +18% qoq), bringing 9M23 core net profit to RM96m (-2% yoy). This was at 68% of our and Bloomberg consensus full-year estimates. As we expect 4Q to be another strong quarter, we deem the results as in line. Note that FY22 core net profit was lifted by the final certification of accounts for some construction projects and our current FY23F core net profit assumes a 2% yoy decline.

• The key highlight was the 21% qoq growth in 3Q23 precast revenue to RM83m with improvement in pretax margin to 8% (2Q23: 5%). The higher revenue was driven by contributions from integrated concrete and prefabrication (ICPH) projects and several newer projects as well as the reversal of provisions for completed projects in 3Q23.

• Construction revenue increased 41% yoy in 3Q23 due to higher contribution from its sustainable energy projects. Pretax margin declined slightly to 7% vs. 8% in 3Q22 as 3Q22 saw a reversal in provision for a legal case.

YTD Wins of RM2.2bn Beat RM2bn Guidance; Awaits Vietnam Project

• Suncon’s YTD wins amount to RM2.2bn, well exceeding its RM2bn new order win target for FY23. Its more recent wins in Oct 2023 were from Daiso Global Distribution Center warehouse at Pulau Indah worth RM595m (Suncon’s share: RM297m), data centre project in Johor worth RM190m, and a preliminary works contract for Song Hau 2 Vietnam power plant worth US$9.5m (c.RM45m).

• Its outstanding order book as at end-Sep 2023 was RM5.8bn.

• More importantly, we believe the US$9.5m limited access works contract for the Song Hau 2 Vietnam power plant is a precursor for an additional RM6bn worth of works for this project. This is assuming the Sunway-PECC2 Consortium clinches the full US$2.4bn Vietnam power plant project, where its 55% stake in the consortium would be worth RM6bn. We understand from Suncon that the project’s award had been delayed due to some country-specific bureaucracy but the situation has since improved.

• We believe the recent wins are also proof that Suncon has been successful in making inroads into the industrial warehouse, data centre and semiconductor factory space, and is now less reliant on traditional building projects. In FY22, Suncon clinched a RM1.7bn industrial project to build a data centre in Sedenak Tech Park, Johor, its largest project clinched that year. Suncon said progress has been slow for this project but the burn rate has been about RM100m in revenue for the past two quarters and should pick up in FY24F.

Reiterate Add and TP of RM2.14

• We reiterate our Add call and SOP-based TP of RM2.14, equivalent to 16.5x FY24F P/E, 0.5 s.d. below its mean since 2015. This is reflective of Suncon’s strong execution track record, ready pipeline from Sunway Berhad (SWB MK, Add, CP: RM1.98), balance sheet strength, and market-leading ROEs of 18-20% and decent dividend yields of 3-4% for FY23F-FY24F, in our view.

• Key risks are increased raw material costs and labour shortages, which appear more contained now. Re-rating catalysts are faster rollout of MRT 3 and revival of the Kuala Lumpur-Singapore high-speed rail (HSR) project – both would lift sentiment on construction stocks like Suncon.

Source: CGS-CIMB Research - 21 Nov 2023