SunCon’s 1QFY22 earnings of RM34.5m (-62.7% QoQ, 70.5% YoY) was within our and consensus expectations at 27%/24% of forecasts. Going forward, SunCon is poised to benefit from MRT3 jobs later this year and could also choose to participate in Indian projects. ICPH, due to commence operations in 2H22 could leverage on strong BTO launches. Maintain forecasts. Maintain BUY with unchanged TP of RM1.84. Existing presence in infrastructure friendly India and healthy internal pipeline is comforting for job flow clarity.

Within expectations. SunCon reported 1QFY22 results with revenue of RM626.6m (- 0.3% QoQ, 37.2% YoY) and core PATAMI of RM34.5m (-62.7% QoQ, 70.5% YoY). The results were within our and consensus expectations coming in at 27%/24% of full year forecasts respectively.

EIs. No EIs were assumed for 1QFY22 and 1QFY21. 4QFY21 were adjusted for RM10.4m of receivables impairment and RM17.3m of legal provision costs (as disclosed in quarterly release).

Dividends. No DPS was declared for the quarter (1QFY21: nil).

QoQ. Core PATAMI fell by -62.7% mainly due to high base in 4QFY21 which saw upward margin recalibration and account finalisation. That aside, construction revenue run rate was roughly in-line with its pre-pandemic levels as site activities normalised. The precast segment was also stronger in 4QFY21 (vs 1QFY22) due to accumulated inventory which were finally delivered coming out of MCO3.0.

YoY. Core PATAMI increased by 70.5% driven mainly by the construction segment as segmental top-line and PBT increased by 39.5% and 95.0% respectively. Although its precast segment recovered with revenue expanding by 8.9%, PBT fell by -71.4% as margins were hit by the higher steel bar prices which makes up close to 50% of the segment’s cost structure. Overall, the earnings increase was primarily due to low base in 1QFY21 as the quarter was mired by 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.

Construction. SunCon‘s latest outstanding orderbook stands at RM4.4bn translating into a decent 2.6x cover. Replenishment progress in FY22 has been relatively challenging with contracts secured so far totalling RM266m (5MFY21: RM462m). We believe this is due to volatility in various costs resulting in delayed awards. We also note that around 48% of the contracts secured are precast jobs in SG. Despite the early struggles, management is maintaining its RM2.0bn target, highlighting that approximately RM500m are in house jobs to which there is better timeline visibility. SunCon is hopeful for MRT3 jobs later this year and could also choose to participate in Indian projects. Going forward, we expect construction margins to drift lower with higher material prices and potentially lower contribution from final account recognition.

Precast. Precast segment performance remains plagued by high costs pressure. SG’s government recent move to co-share 50% of the increase in steel and precast components may benefit its precast division moving forward. SunCon’s 49% owned ICPH precast plant in SG will be operational by 2H22 representing an effective 29% increase to existing capacity. While construction activity in SG is still grappling with labour shortages in the 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. Maintained. Introduce FY24 earnings forecast of RM134.7m.

Maintain BUY, TP: RM1.84. Maintain BUY with unchanged TP of RM1.84 as we maintain our earnings forecast. TP is derived by pegging mid FY22 EPS to 15x ex cash P/E. SunCon is well positioned to partake in various infrastructure rollouts ahead. 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 labour shortage.

Source: Hong Leong Investment Bank Research - 26 May 2022