SunCon’s 1QFY21 earnings of RM20m (-47% QoQ, +15% YoY) were below our and consensus expectations at 14% of full year forecasts mainly due to productivity loss from MCO2.0. At the lowest, productivity was only 50% of pre Covid levels. SunCon‘s latest outstanding orderbook stands at RM5.0bn translating into a healthy 3.2x cover. Tweak FY21-22 earnings by -5/-8%. Maintain BUY with lower TP of RM1.88. We believe given its impressive execution track record, Suncon is well positioned to partake in pump priming initiatives.

Below expectations. SunCon reported 1QFY21 results with revenue of RM455.2m (- 27.4% QoQ, +24.4% YoY) and core PATAMI of RM20.2m (-46.5% QoQ, +15.3% YoY). Core PATAMI accounted for 14% of our and consensus full year forecast which fell below expectations. Results shortfall was mainly caused by slower than expected billing and weak construction margins.

Dividends. No DPS was declared for the quarter (1QFY20: nil).

QoQ. Core PATAMI decreased by -46.5% falling in tandem with revenue (-27.4%) which were dragged by both construction (-28.0%) and precast (-19.7%) segments. Construction billings fell this quarter with the imposition of MCO2.0 resulting in stringent SOP procedures coupled with stern housing compliance. At the lowest, productivity was only 50% of pre-Covid levels. All of which resulting in lower construction PBT margin (-0.8%).

YoY. Core PATAMI increased by 15.3% buoyed by rebound in revenue (+24.4%). This is no surprise given the strict lockdown imposed in 1QFY20 causing two weeks of lost revenue while still incurring costs.

Steady orderbook. SunCon‘s latest outstanding orderbook stands at RM5.0bn translating into a healthy 3.2x cover. So far in 2021, SunCon has secured RM462m worth of jobs made up of RM185m precast and RM263m in-house jobs. Management has a RM2bn replenishment target in 2021 while we have assumed RM1.7bn this year. Some of the earmarked jobs include Sunway Valley City, Giza Medical Centre, LSS4 EPCC, precast (RM200m) and conversion of remaining tenders of highways in India. Outstanding tenderbook stands at RM7bn whereby >50% are jobs in India (Metro/highways), Singapore (precast) and Philippines (piling) as these countries embark on infrastructure drives.

Precast. Precast segment profitability improved with PBT margin expanding by 8.6ppts YoY driven by recognition of higher margin projects as well as low base from last year. Nonetheless, margins may contract if steel prices sustain at current levels. SunCon has locked in steel prices for a period of 6 months. Management expects a pickup in precast revenue in coming quarters after a soft 1QFY21. However, we believe a pickup may not be strong as construction industry in Singapore faces a manpower crunch which should affect offtake of its precast products

Forecast. We tweak our FY21-22 earnings by -7.5 and -5.0% after adjusting for margins and billings assumptions. Introduce FY23 earnings of RM136m.

Maintain BUY, TP: RM1.88. Maintain BUY with lower TP of RM1.88 (from RM2.01) following the 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 - 27 May 2021