SunCon’s 1QFY20 earnings of RM18m (-17% YoY) were below ours and consensus expectations. 1QFY20 core PATAMI decreased due to lower contribution from construction segment as a result of the MCO. Outstanding order book of RM5.5bn translates into a healthy 3.1x cover ratio. Going forward, we expect stronger earnings in 2HFY20 as work progress normalises post CMCO. Cut FY20 earnings by 31% and keep FY21-22 earnings unchanged as we anticipate full operational recovery by then. Maintain BUY with higher TP of RM2.10 after rolling over earnings to FY21 based on 15x ex-cash PE multiple. Investors should look ahead towards a likely resuscitation of pump priming.

Below expectations. SunCon reported 1QFY20 results with revenue of RM365.8m (- 25% QoQ, -17% YoY) and core earnings of RM17.6m (-52% QoQ, -40% YoY).The core earnings accounted for 12% of our full year forecast (consensus: 13%) falling below expectations. No dividends were declared for the quarter (1QFY19: nil).

Deviations. The results shortfall was attributed mainly to weak progress billings at its construction segment due to the 2 week work halt resulting from the MCO.

YoY/QoQ. YoY and QoQ core PATAMI declined by -40% and -52% respectively due to lower construction revenue, compounded by negative operating leverage as stop work order was implemented pursuant to the MCO.

MCO updates. Pursuant to the CMCO, all construction works were allowed to restart from 4 May whereby strict adherence to SOP and virus screening for all foreign workers are required. To accelerate the process, Suncon has screened all of its direct foreign workers at private clinics (costs are reimbursable as all are Socso contributors). In total (inclusive of business partners’ workers), c.95% of required labour have been tested with c.50% having received results. Operations are on target to normalise by 3QFY20.

Internal job award. Along with the results release, Suncon announced an internal group job award from Sunway Education Group for the development of Sunway International School in Subang Jaya for a contract value of RM121m. Project is expected to commence on 15th June 2020 with completion slated for 30th June 2022. This brings total projects secured for the year to RM688m.

Maintaining orderbook targets. SunCon’s latest outstanding orderbook stands at c.RM5.5bn, translating into a healthy level of 3.1x cover of FY19 revenue. Active outstanding tenderbook stands at RM7.3bn, largely overseas focused. Noticeably, management has maintained its orderbook replenishment target of RM2bn this year. Previously, management anticipated RM800m of internal jobs, RM500m from external building jobs, RM300m from its geotechnical division and remaining RM400m from solar and precast.

Precast. Precast segment saw stronger PBT contribution of RM0.8m (1QFY19 PBT: RM0.1m) as permission was obtained to deliver during the MCO. Margins improved YoY by 1.8ppts to 2.1% driven by higher yielding projects. Construction projects in Singapore will only gradually restart from 2nd June onwards with priority given to critical projects (public housing included) with an estimated 10% of the construction workforce to be back at work by end-June. While it is possible for Suncon to ramp up utilisation rates to 75% (from 60% prior to MCO) to make up for production halts, gradual work resumption in Singapore may delay the recovery. Nonetheless, we expect PBT margin for this segment to normalize to c.10% by year end buoyed by works ramp up and higher contribution from higher margin projects.

Source: Hong Leong Investment Bank Research - 28 May 2020