SunCon’s 9MFY22 earnings of RM97.8m (86.9% YoY) came in within both our and consensus expectations at 75%/74% of forecasts. As expected, SunCon’s 2HFY22 is weaker than 1HFY22 due to ramping up period of newly secured projects. Latest outstanding orderbook stands at RM4.0bn (2.3x cover). We believe there are outstanding commercial project tenders but awards could come once things stabilise. ICPH is on track to commence operations in Dec-22. We tweak FY22/23/24 earnings forecasts by -0.1%/-2.4%/+0.7%. Maintain BUY with lower TP of RM1.83. SunCon presents a safer exposure to future infrastructure project rollouts, backed by strong support from parent-co. Nevertheless, our call is premised on no disruptive infrastructure policies from the impending government.

Within expectations. SunCon reported 3QFY22 results with revenue of RM469.3m (- 15.9% QoQ, 72.5% YoY) and core PATAMI of RM25.7m (-31.6% QoQ, 6.3% YoY). This brings 9MFY22 core PATAMI to RM97.8m, increasing by 86.9%. The results were within our/consensus expectations coming in at 75%/74% of full year forecast.

EIs. We have adjusted 3QFY22 core PATAMI for RM4.4m of receivables impairment and RM1.3m of financial assets accretion.

Dividends. No DPS was declared for the quarter (9MFY22: 3.0 sen; 9MFY21: 1.25 sen).

QoQ. Core PATAMI fell by -31.6% mainly due to higher base in 2QFY22 which saw contribution from completing projects coupled with still weak recognition cycle for newly secured projects in 3QFY22. We were earlier expecting a downward normalisation in 2HFY22 as guided by management. That aside, construction revenue run rate was roughly similar to pre-pandemic levels as site activities normalised. The precast segment was also stronger in 3QFY2 due to higher deliveries for newer projects.

YoY. Core PATAMI increased by 6.3% driven by both construction and precast segments resulting in higher PBT (+38.2%). Recall 3QFY21 was hit by MCO3.0/Phase1 dragging down billings. Nonetheless, the improved performance was impacted by a much higher effective tax rate (3QFY22: 33.5%; 3QFY21: 18.4%).

YTD. Core PATAMI increased by 86.9% due to low base effect as 9MFY21 saw various forms of lockdowns. 1HFY22 was also boosted by profits from completing projects. Apart from this, we reckon its precast segment performance rode on a stronger SGD rate, appreciating by 2.3% (as reported by SunCon).

Orderbook. SunCon‘s latest outstanding orderbook stands at RM4.0bn (2.3x cover). Total wins in FY22 amounts to RM882m with the latest being a RM278m contract for the construction of a residential condominium. Our previous replenishment forecast for FY22 was RM1.1bn. We understand that other than infrastructure projects, SunCon has outstanding tenders for commercial projects where we believe awards will be delayed until the post-GE15 political situation is resolved. The rollout of MRT3 hangs in the balance with best case scenario being awards in 1QCY23 while worst case scenario could see cost optimisation and an uncertain award timeline. At the moment we do not think the project will be shelved as external economic uncertainties next year could result in more domestic pump priming. To recap, SunCon submitted bids for CMC301 and CMC302 holding majority stakes in both JVs.

Precast. SunCon’s 49% owned ICPH precast plant in SG is undergoing commissioning process and is expected to be operational by Dec-22. 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).

Forecast. We tweak FY22/23/24 earnings forecasts by -0.1%/-2.4%/+0.7% after conservatively adjusting downwards replenishment assumptions for FY22 and FY23 in light of uncertainties.

Maintain BUY, TP: RM1.83. Maintain BUY with marginally lower TP of RM1.83 (from RM1.86) post-earnings adjustments. TP is derived by pegging mid FY22 EPS to 15x ex-cash P/E. SunCon presents a safer exposure to future infrastructure project rollouts, backed by strong support from parent-co. Nevertheless, our call is premised on no disruptive infrastructure policies from the impending new government. Risks: MRT3 cancellation, prolonged political deadlock, elevated materials prices and labour shortage.

Source: Hong Leong Investment Bank Research - 23 Nov 2022