SunCon’s 1HFY22 earnings of RM72.1m (156.1% YoY) beat both our and consensus expectations at 57%/54% of forecasts. Going forward, SunCon is poised to benefit from: i) MRT3 jobs, ii) sizable factory/data centre job and iii) RM500m worth of in-house jobs. ICPH, due to commence operations in 2H22 could leverage on strong backend loaded BTO launches. Increase FY22 earnings forecasts by 8.2%. Maintain BUY with higher TP of RM1.90. SunCon is well positioned to partake in various infrastructure rollouts ahead. Its hea lthy balance sheet with net cash position of RM0.30/share (including financial investments), track record and strong support from parent-co.

Beats expectations. SunCon reported 2QFY22 results with revenue of RM557.9m (- 10.7% QoQ, 48.7% YoY) and core PATAMI of RM37.6m (8.9% QoQ, 374.5% YoY). This brings 1HFY22 core PATAMI to RM72.1m, increasing by 156.1%. The results beats both our and consensus expectations coming in at 57%/54% of full year forecasts respectively. 2QFY22 has been adjusted for RM5.3m worth of net expenses with RM6.3m receivables impairment being the main line item.

Deviation. The results beat were top-line driven with stronger than expected construction billings seen.

Dividends. DPS of 3.0 sen was declared for the quarter (1HFY22: 3.0 sen; 1HFY21: 1.25 sen).

QoQ. Core PATAMI increased by 8.9% (excluding EIs as mentioned above) offsetting a -10.7% decline in revenue. While both construction and precast segments saw a sequential fall in revenue, the better performance was due to higher core construction and precast margins. Construction billings were lower this quarter resulting from higher recognition of projects nearing completion in the immediate preceding quarter.

YoY/YTD. Core PATAMI increased by 374.5% and 156.1% on a YoY and YTD basis brought about by significantly higher revenue contribution from both segments as 2QFY21 was marred by MCO3.0 implemented starting June-21.

Orderbook. SunCon‘s latest outstanding orderbook stands at RM4.2bn translating into a decent 2.5x cover. Contract replenishment has lagged expectations with only RM536m replenished so far. The only notable contract secured in 2QFY22 is the LRT3 GS06 subcontract works worth RM191m. SunCon is in the midst of tendering for sizable factories and data centre jobs which are worth RM1.0-1.5bn individually. Elsewhere, SunCon has ~RM500m worth of in-house jobs that could also be converted into awards this year. While we believe volatile nature of costs movement through the year has negatively impacted award conversion, we believe that SunCon could also be preserving balance sheet space to bid for the MRT3 turnkey package. If unsuccessful, the company would still be a strong subcon candidate. All in all, management is maintaining their orderbook replenishment target of RM2.0bn (HLIBf: RM1.6bn).

Precast. Costs pressure on the precast segment is showing signs of dissipating, thanks to recent drop in steel prices. Adding to this, SG’s government move to co share 50% of the increase in steel and precast components would 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. Demand for SunCon’s precast could remain robust considering HDB’s plan to launch up to 23k BTO units in 2022, a 35% increase from 2021 launch of 17k units. YTD, HDB has launched 8.5k units with 4.9k planned for Aug-22. The remainder 9.5k will be launched in Nov-22.

Forecast. Increase FY22 earnings forecasts by 8.2% after increasing burn rate and marginal increase in margins.

Maintain BUY, TP: RM1.90. Maintain BUY with higher TP of RM1.90 post-earnings adjustments. 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), track record and strong support from parent-co. Risks: prolonged elevated materials prices, election risks and labour shortage.

Source: Hong Leong Investment Bank Research - 24 Aug 2022