SunCon’s 9MFY21 earnings of RM52m (-3% YoY) was above our but within consensus expectations at 72%/67% of forecasts driven by better-than expected construction margin from upwards recalibration. Earnings are expected to back-loaded with operations fully ramped up in 4Q. We have reduced replenishment assumptions further to RM1.5bn. Tax implications in 2022 should be mitigated. Cut FY22-23 earnings by 4-5%. Maintain BUY with lower TP of RM1.80. Existing presence in infrastructure friendly India and strong internal pipeline is comforting post-uninspiring Budget-22.

Above expectations. SunCon reported 3QFY21 results with revenue of RM272.1m (-27.5% QoQ, -35.1% YoY) and core PATAMI of RM24.2m (205.4% QoQ, -24.1% YoY). This brings 9MFY21 core PATAMI to RM52.4m, declining marginally by -3.0%. The results beat our expectations but were within consensus at 72%/67% of full year forecasts respectively. This due to our expectations that operations will come in stronger in 4Q. Note that 3QFY21 earnings are adjusted for RM4.9m of receivables impairment.

Deviations. Results beat due to better-than-expected margins from the construction division.

Dividends. No DPS was declared for the quarter as they are normally declared in 2Q and 4Q (9MFY21: 1.25 sen; 9MFY20: 1.25 sen).

QoQ. Core PATAMI tripled despite revenue falling by -27.5%. Margins were better (EBIT: +8.3ppts), lifted solely by the construction segment as margins were recalibrated upwards for several projects approaching tail end to which costs could be estimated with higher certainty. 2QFY21 also saw around RM5.7m of one-off bank charges on financial closure of both Indian Highway projects which depressed margins slightly.

YoY. Core PATAMI fell by -24.1% dragged by imposition of lockdowns during the quarter evidenced by revenue contraction of -35.1%. Relaxation of strict operational restrictions was only announced in mid-Aug with recovery gradual towards end of the quarter. Partially offsetting the impact of decreased revenue is the margin recalibration for projects approaching tail end phases of completion.

YTD. Core PATAMI decreased marginally by -3.0% due to weaker margins (PBT: -1.2ppts) for its construction segment which negated the topline growth of 19.1%. Margins were weaker overall as FY20 saw extensive costs rationalisation measures in place and removal of bonus provisions.

Maintaining guidance despite time running out. Latest orderbook stands at RM4.7bn translating into a healthy 3.0x cover. Replenishment has been below expectations achieving RM796m~40% of target (RM2.0bn) due to delays in conversion from customers. We believe this may have led to lagging share price performance vs. KLCON since peak political impasse in Aug-21. We think lumpy awards could still materialise given a portion of tenders are internal and are individually quite sizable. However, with time running out we reduce our FY21 assumption from RM1.7bn (including precast) to RM1.5bn. Tenderbook is mostly unchanged at RM8.0bn (20% overseas). Given a lacklustre Budget-22/12MP, SunCon may have to leverage on its presence in India. The country’s plans to double highway networks by 2025 as outlined under its ambitious USD1.5tn national infrastructure masterplan (spans 25 years).

Precast. Precast segment performance has deteriorated slightly QoQ falling into losses despite higher revenue as the impact of higher steel costs came in. The division currently has a record high orderbook of RM504m~60% secured this year. We reckon should steel prices reverse its course, orders secured this year could have margin upside. Assistance pass-through from main-con due to aid rendered by the SG government may lessen the impact as well. However, we think near term challenges will persist with construction activity in SG weak as foreign workers have declined by 20% since the pandemic. Construction players in SG are also bracing for further delays when the vaccinated travel lane (VTL) launches end Nov-21.

Manageable tax headwinds. SunCon anticipates negligible impact from the one-off Cukai Makmur as its subsidiaries individually are not expected to generate more than RM100m in FY22. SunCon’s unutilised capital allowances could help to this extent. Another tax measure introduced is the removal of tax exemption for foreign sourced income upon remittance. We note SunCon’s foreign operations in India & SG are subject to double taxation avoidance agreements with Malaysia; impact could be largely mitigated through tax credits claims, in our view.

Forecast. Cut FY22-23 earnings by -4.4% and -3.6% after reducing job win assumptions. No changes to FY21 despite the positive results surprise as we prefer to err on the side of conservatism.

Maintain BUY, TP: RM1.80. Maintain BUY with lower TP of RM1.80 post earnings adjustments. TP is derived by pegging FY22 EPS to 15x ex-cash P/E. Suncon is well positioned to partake in pump priming initiatives should it happen. Its healthy balance sheet with net cash position (RM0.30/share), existing presence in India and strong support from parent-co Sunway Bhd should provide job flow clarity post-uninspiring Budget-22. 

Source: Hong Leong Investment Bank Research - 19 Nov 2021