SunCon hopes to augment its existing RM4.2bn orderbook with multiple MRT3 bids as well as precast wins, riding on strong HDB pipeline. We have pencilled in RM3.2bn total wins in FY23 with RM2bn from MRT3. The balance could come from a combination of internal, precast, LRT3 and external jobs. Its 49% owned ICPH plant is undergoing commissioning and could start meaningful contribution by mid-2023. Post meeting we tweak FY22/23/24 forecasts by - 5.4%/-1.3%/+4.5%. Maintain BUY with lower TP of RM1.86. SunCon is well positioned to partake in various infrastructure rollouts ahead. Post parliament dissolution, there has been sector wide de-risking. Our base case of no major policy changes post GE leads us to see current share price weakness as a good entry point.

We Hosted a Meeting With SunCon Recently With the Following Key Takeaways:

Tender developments. Key developments for SunCon’s tender activities are mainly its bids for MRT3’s CMC301 and CMC302 packages which are the project’s elevated sections. Both bids are undertaken through a JV/consortium with SunCon holding majority stakes. We gather that these partners are privately owned contractors experienced in the field of domestic infrastructure construction. According to MOF, the project’s construction cost comes to a total sum of RM34.3bn. In view of the upcoming elections coupled with possible floods, awards for the aforementioned packages could come in 1Q23 (HLIB base case: assuming no drastic changes in policies post GE). We are not aware of any instances where mega contracts have been awarded under the stewardship of a caretaker government. In the event the company goes empty handed for Tier 1 contracts, we expect a yield of ~RM2.0bn in subcontracts wins, similar to past wins for previous railway iterations. This is not necessarily a negative as Tier 1 package winners will be burdened by risky contract terms. Outside of MRT3, the company could still secure roughly RM200-300m from parent-co this year for a residential project while tenders for external commercial projects are still outstanding. SunCon could also benefit from increased scope of LRT3 (additional ~RM1.0bn) should it materialise next year. We gather that majority of replenishment source from parent-co has been pushed into next year due to changes in planning.

Labour. The company has started receiving more workers of late. Management expects to receive roughly 250 foreign workers by end-Oct and would bring their tally of direct foreign hires to ~400-500. Nevertheless, this still falls below 600-800 under their stable pre-pandemic. We think it’s reasonable to expect higher labour requirements with orderbook levels likely to go up next year. For the sector in general, we think that number of foreign workers should gradually go up moving ahead – however, inflated daily wage rates are likely to persist. Rates for general workers have surged by 30-50% this year while skilled rates have gone further. Meanwhile based on previous news articles, implementation of the multi-tier foreign levy could result in a blended 20-30% increase in levies. While the immediate incremental direct cost to SunCon is likely marginal, it does add to the sector’s inflationary cost burden.

Precast kicker next year. SunCon’s 49% owned ICPH precast plant in SG is undergoing commissioning process and could start operations before year end. According to management, estimated payback period is 9 years. SunCon’s 49% stake capex spent comes to SGD80m of which SGD12.6m amounts to land costs. We expect the plant to ramp up and start contributing positively by early-2023. The ICPH plant is a fully robotic automated precast plant located in Pulau Punggol Barat, SG. With this, SunCon’s precast product range expands to comprise large panel slabs, precast walls and tunnels for infrastructure projects (vs. currently mainly prefab bathroom units).

Expecting a weaker 2H22. After a strong 1H22 showing (1H22 Core PATAMI: RM72.1m), SunCon’s 2H22 performance could turn in relatively weaker. This downward normalisation is due to 1H22 being a beneficiary of several projects approaching the tail end bringing with it release of buffers to the P&L. As newly secured projects are still ramping up, earnings recognition cycle is not yet strong. Add to this the labour supply issues affecting the sector from productivity and cost inflation impact, we now expect weaker sequential top-line and slight margin deterioration.

Forecasts. Tweak FY22 and FY23 forecasts down by -5.4%/-1.3% but increase FY24 forecasts by 4.5%. Adjustments are due to delaying orderbook replenishments to next year and slower contribution from ICPH precast plant.

Maintain BUY, TP: RM1.86. Maintain BUY with marginally lower TP of RM1.86 (from RM1.90) post-minor tweaks to earnings. 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. Our base case of no major policy changes post GE leads us to see current share price weakness as a good entry point. We like the stock for its healthy balance sheet (NCPS: RM0.30), track record and strong support from parent-co. Risks: change in government policies, prolonged elevated materials prices and labour shortage.

Source: Hong Leong Investment Bank Research - 18 Oct 2022