SunCon’s 9MFY20 earnings of RM54m (-45% YoY) were within our but above consensus expectations. 3QFY20 core PATAMI rebounded post-MCO with construction segment normalising while precast is anticipated to normalise by 4QFY20. Outstanding order book of RM5.6bn translates into a healthy 3.2x cover ratio. We expect stronger earnings going into FY21 partly driven by projects approaching optimal phase. Maintain forecasts and BUY call with unchanged TP of RM2.11 based on 15x ex-cash PE multiple.

Within expectations. SunCon reported 3QFY20 results with revenue of RM419.4m (+199% QoQ, +4% YoY) and core PATAMI of RM31.9m (+600% QoQ, -10% YoY). This brings 9MFY20 core PATAMI to RM54m, decreasing by -45% YoY. Core PATAMI accounted for 62% and 71% of our and consensus full year forecast which is within ours but above consensus expectations after accounting for backend heavy FY20 due to MCO.

Dividends. No dividends were declared for the quarter (9MFY20: 1.25 sen; 9MFY19: 3.50 sen).

QoQ. Core PATAMI surged 7-fold as revenue rebounded (+199%) with both construction and precast segments revenue surging by 194% and 434% respectively. This was largely due to low base effect in 2QFY20 as various forms of MCO were imposed in Malaysia resulting in construction inactivity up to 2.5 months whilst imposition of circuit breaker hampered precast deliveries to Singapore.

YoY. Core PATAMI declined by -10% despite revenue growth of 4% (Construction revenue: +11%; Precast revenue: -57%) mainly due to higher effective tax rate as a result of under provision previously. At the operating profit level, performance was up by 12% as higher margin precast projects kicked in coupled with higher construction contribution driven by the TNB project.

YTD. Core PATAMI fell by -45% in tandem with sharp revenue contraction of -28%. This was on the back of construction inactivity from 18-Mar to 31-May with a majority of June spent normalising productivity levels. On the precast side, operations were hampered for most of 2QFY20 while 3QFY20 productivity levels were less than 50% due to slow construction restart in Singapore.

Healthy orderbook. SunCon‘s latest outstanding orderbook (including Oct job wins) stands at 5.6bn translating into a healthy 3.2x cover. Despite a difficult year, SunCon trumped its replenishment guidance (6 years running). Management is expecting FY21 order wins of RM2.0bn, flattish relative to FY20 but c.13%/29% higher than FY18/19. We estimate 61% of outstanding orderbook comes from jobs won in FY19 and FY20 suggesting strong earnings recognition going into FY21 as these projects enter optimal construction phase. To achieve their FY21 target, SunCon maintains a tenderbook of RM5.3bn whereby >50% are jobs in India (Metro), Singapore (precast) and Philippines (piling) as these countries embark on infrastructure drives. To be conservative, we are pencilling in RM1.7bn for FY21.

Precast. Precast segment profitability rebounded as PBT margins improved by 7ppts YoY as higher margin projects kicked in. We expect sustained rebound in coming quarters as all jobs have been given green light to commence work by end Sept-2020 compared to only 19% approved by end June-2020. Aiding the recovery is sustained launches of BTO units amounting to 16.7k YTD (2019: 14.6k; 2018: 15.8k).

Forecast. Maintained as earnings are inline.

Maintain BUY, TP: RM2.11. Maintain BUY with unchanged TP of RM2.11. TP is derived by pegging FY21 EPS to 15x ex-cash P/E. 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 RM0.25/share and strong support from parent-co Sunway Bhd should provide job flow clarity during these uncertain times.

Source: Hong Leong Investment Bank Research - 20 Nov 2020