SunCon’s 1HFY21 earnings of RM28m (+27% YoY) was below our and consensus expectations at 29%/24% of full year forecasts mainly due to weaker than expected margins. SunCon is expected to fully vaccinate its construction workers by end Sept-21 which will enable full operating capacity. Latest orderbook stands at RM4.8bn translating into a healthy 3.1x cover. Cut FY21 earnings by 25%. Maintain BUY with unchanged TP of RM1.87. We believe given its impressive execution track record, SunCon is well positioned to partake in pump priming initiatives.

Below expectations. SunCon reported 2QFY21 results with revenue of RM375.3m (- 17.6% QoQ, 167.7% YoY) and core PATAMI of RM7.9m (-60.9% QoQ, 73.9% YoY). 1HFY21 core PATAMI of RM28.2m (+27.4%) were below expectations accounting for 29% and 24% of our and consensus full year forecast respectively. Results shortfall was mainly driven by weaker than expected margins for both construction and precast businesses.

Dividends. DPS of 1.25 sen going ex on 9 Sept-21 was declared for the quarter (1HFY21: 1.25 sen; 1HFY20: 1.25 sen).

QoQ. Core PATAMI decreased by -60.9% driven by revenue decrease of -17.6%. Declines were seen in both construction (-17.1%) and precast (-22.9%) segments as Phase 1 restrictions resulted in only 20-30% of construction orderbook active while SunCon’s precast factories were not operational as materials manufacturing was shut down by authorities in Phase 1.

YoY. Core PATAMI increased by 73.9% boosted by higher revenue (+167.7%). Impressive YoY numbers is mainly due to low base effect as strict lockdown (MCO1.0) of roughly 4 weeks was reflected in 2QFY20. By comparison 2QFY21 only had 1 month of Phase 1 restrictions.

YTD. Core PATAMI increased by 27.4% driven by revenue rebound in construction (+65.1%) and precast (+52.8%) segments. However, improvements were partially diluted by net margin contraction (-1.0 ppts) as FY20 saw better cost rationalisation and removal of bonus provisions. We reckon that the steep increase in steel prices also contributed to weaker margins in 1H.

Decent orderbook. SunCon‘s latest outstanding orderbook stands at RM4.8bn translating into a healthy 3.1x cover. Replenishment has been challenging thus far securing RM620m of its RM2.0bn target (31%). Management remains steadfast in achieving its targets this year. While lumpy awards may still materialise, we reckon this could take place late into the year leading to slower works ramp up. SunCon tenderbook remains sizable at RM8.3bn (32% overseas: SG, Philippines and India). Other local outstanding tenders are Sunway Valley City, Giza Medical Centre, LSS4 EPCC.

Precast. Precast segment performance was weak at breakeven levels with complete manufacturing shutdown in June. While deliveries were still permitted, construction activity in SG was also disrupted by supply chain issues leading to slower offtake.

Vaccination. SunCon is expected to fully vaccinate its construction workers by end Sept-21. This is largely dragged down by slower vaccination pace in the Northern and Southern regions (c.8% of orderbook). We believe vaccination for its KV projects should be completed earlier which points toward a better end to the year.

Forecast. Cut FY21 Earnings by -24.9% After Recalibrating for Margin Assumptions.

Maintain BUY, TP: RM1.87. Maintain BUY with unchanged TP of RM1.87. TP is derived by pegging FY22 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 (RM0.21/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 Aug 2021