SunCon is on track for a stronger earnings performance in the coming quarters with productivity levels normalising close to pre-pandemic era, further buoyed by acceleration of its Indian projects. Usual replenishment guidance of RM2bn is maintained for 2022 with possible upside from spill over of 2021’s guidance miss. SunCon is looking to deploy capital more efficiently by way of either domestic or Indian PFI opportunities. Prospects for its precast segment looks healthy with anticipated 35% increase in BTO launches in 2022 & 2023. Increase FY21 and FY23 earnings forecasts by 17.7%/3.4%. Maintain BUY with unchanged TP of RM1.77. Existing presence in infrastructure friendly India and healthy internal pipeline is comforting for job flow clarity.

We Met SunCon Recently With the Following Key Takeaways:

Billings to recover. SunCon is on track for a stronger earnings performance in the coming quarters as pandemic disruption normalises. We gather that the recent poor weather and flooding (4Q21) has spared the group’s construction projects. Case in point, progress for the LRT3 package in Klang was not affected as structure intensive phase has passed. We also expect a continuation of earnings boost in the next quarter from recognition of conservatively recognised projects that have reached advanced phases (similar to 3Q21). Despite pandemic enforced restrictions affecting sector productivity levels in general, management indicates that productivity levels have normalised close to pre-pandemic era after 2 years of “learning to live with Covid”. We are comforted by this but at the same time remaining cautious due to slow fresh foreign labour intake developments and potential for case resurgence over the course of 2022.

India. Billings from its two HAM projects in India (RM823m) should accelerate in FY22; indications are that execution rate has ramped up by 4 folds in Jan-22 vs Dec- 21. Completion rates for both projects are targeted to be c.50% by year end (as at 3Q21: negligible). The country is undertaking an infrastructure drive featuring vast road and rail network expansion which bodes well for SunCon in the long term. The company is looking to participate in HAM road projects should there be no domestic PFI opportunities in 2022. We are unperturbed by its participation in balance sheet intensive projects due to: (i) likely financed through 60% owned JV SunCon-RNS; mitigates outlay and (ii) better deployment of capital (est. RM615m idle cash including investments). Previous guided India EBIT margin is >10% vs domestic of 5-8%.

Usual RM2bn guidance maintained. After an uncharacteristic guidance miss in 2021, SunCon is maintaining its usual replenishment guidance of RM2bn for 2022. Breakdown is equally split between internal, infrastructure, overseas and piling division. A majority of its internal target is gradual rollout of Sunway Ipoh City project while parent-Co’s sustained launch targets for FY22 could also aid in achieving its replenishment targets. There is upside risk to the guidance due to spill over from 2021’s miss of ~RM500m. The guidance also does not include potential domestic PFI projects like MRT3. To this end, SunCon intends to participate as either: (i) contractor with deferred payment option and/or (ii) collaboratively with parent-co should MRT3 employ property development components in its financing structure. The latter option might be less strenuous on SunCon as it could capitalise on parent’s financial strength. Accordingly, contract opportunities could include internal contracts in addition to civil works opportunities from the railway line.

Precast. SunCon’s 49% owned ICPH precast plant in SG will be operational by 2H22 representing an effective 29% increase to existing capacity or an additional 37k m3/pa. Despite construction activity in SG still grappling with labour shortages near term, demand for SunCon’s precast could remain robust considering HDB’s plan to launch up to 23k BTO units in 2022 and 2023, a 35% increase from 2021 launch of 17k units (past 4 years have ranged between 15-17k units). According to HDB, total unit launches could be up to 100k units for 2021-2025 which is a positive development for SunCon. The new plant is expected to be margin accretive once ramped; we think due to lower logistics and labour costs (fully automated). Both are typically 30% of precast cost structure.

Forecast. Increase FY21 & FY23 earnings forecasts by 17.7% and 3.4% respectively.

Maintain BUY, TP: RM1.77. Maintain BUY with unchanged TP of RM1.77 as our FY22 EPS is unchanged. 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 of RM0.30/share (including financial investments), existing presence in India and strong support from parent-co Sunway Bhd should provide job flow clarity. Risks: prolonged elevated materials prices, election risks and pandemic setbacks.

Source: Hong Leong Investment Bank Research - 4 Feb 2022