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. Management is aiming for RM2bn worth of jobs this year with internal jobs forming the bulk of this. Precast operations are gradually recovery in tandem with SG’s productivity pickup and consistent HDB launches. Tweak FY20-21 earnings by 5-7% as we tone down billings assumptions. Maintain BUY call with lower TP of RM2.01 based on 15x ex-cash PE multiple.

We Met With Management Recently With the Following Key Takeaways:

FY21 job wins target. SunCon is maintaining its RM2bn replenishment target in 2021 to be dominated by in-house jobs (similar to FY20). Some of the earmarked jobs include Sunway Valley City (RM750m), Giza Medical Centre (RM200m), LSS4 EPCC (RM100m), precast (RM200m), KLCC as well as conversion of remaining tenders of highways in India. We have pencilled in a conservative RM1.7bn worth of jobs which mitigates the risk of slow conversion for external jobs. Possible upside risk to this target is speedy implementation of MRT3 which we reckon may only come in 2022 at the earliest.

MCO 2.0 bites. While all of SunCon’s sites meet KKR/MITI’s guidelines for continued operations, we gather that on average across all its projects, productivity levels are at c.50% after a week of MCO 2.0. We believe substandard 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 RM318m vs monthly fixed costs of RM15m 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.

Costs pressure. Local steel prices have increased by roughly 30% (vs. 2020 average) to RM2.6-2.7k range currently (MITI). In mitigating short term spikes in steel prices over the short term, SunCon practices a policy of locking in forward 6 months’ supply of steel. By our estimation, assuming steel prices hover at current levels for the remainder of 2021 this would represent c.0.6% contraction in its construction GP margin translating into FY21f earnings downside of c.7%.

Precast. Orders from construction sites in SG are recovering in tandem with the sector’s recovering productivity. This is further sustained by consistent HDB launches in SG despite the pandemic. Launches slated for 2021 should fall in the 17k 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.

ESG initiatives. 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 Berhad’s social programmes.

Forecast. Tweak FY20 & 21 earnings by -6.9% and -5.4% after toning down billings assumptions to factor in MCO2.0 impact

Maintain BUY, TP: RM2.01. Maintain BUY with lower TP of RM2.01 post-earnings adjustment. 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 RM0.30/share and strong support from parent-co Sunway Bhd should provide job flow clarity during these uncertain times.

Source: Hong Leong Investment Bank Research - 4 Feb 2021