Following the government’s permission for companies previously allowed to operate under MCO to go full swing now, SUNCON is ready to resume its construction activities. This is positive, enabling the Group to catch up with the slack resulting from the MCO enforcement since mid-March. We have lowered our FY20E/FY21E earnings by 27%/12% after factoring in timing delays of income recognition and lower margin assumptions. Downgrade our call from OP to MP on unchanged TP of RM1.80 (based on PBV of 3.75x) as the stock has climbed 24% since our upgrade in late March.

Resumption in construction activities. With the government now allowing companies previously permitted to operate under the first 3 phases of MCO (Movement Control Order) to resume full operational capacity without restrictions (subject to compliance of strict SOP measures), SUNCON is eager to resume works at its construction sites as early as possible. After a virtual standstill for six weeks since mid March, which translates to a downtime of 11.5% of full-year productivity, the Group is planning to resume construction activities gradually in May before going full swing from June onwards assuming minimal disruptions in the supply chain.

Post conference call jottings. The key takeaways are as follow: (i) SUNCON’s cash-flow situation remains well under control despite near zero construction activity during the MCO period, with monthly fixed overhead cost amounting to RM15m while still receiving payments from past billings from clients totalling RM170m in Jan and Feb, (ii) current tender-book stands at c.RM7b, equally split between local and overseas (from India) jobs, (iii) it is premature to revise its internal new contract wins target of RM2b at this juncture, (iv) its recently secured Indian highway project (valued at an equivalent c.RM500m) from the National Highways Authority of India is expected to yield PBT margin of above 10% (vs. the Group’s average of 5-8%) with maiden income contribution likely to kick in from early 2021 and spread over two years, and (v) the re-negotiation of its LRT3 package with MRCB-George Kent (the project turnkey contractor) is expected to be finalised soon.

For the LRT3 package, we reckon a 40-50% cut from the remaining contract value of RM1.7b driven by changes in scope of works (in tandem with the government-initiated overall project cost revision of 47%) would reduce its existing order-book of RM5.7b by 12-15%, although margins are likely to be intact. Meanwhile, its precast business could show better contributions this year (vs. FY19 net profit of RM3.4m) on the back of a healthy existing order-book of c.RM180m.

Earning tweaks. We keep our full-year order-book replenishment target at RM2b while adjusting for some timing delays of income recognition and lower margin assumptions. This led us to reduce our earnings to RM123m (-27%) for FY20E and RM156m (-12%) for FY21E.

Downgrade to MARKET PERFORM. Our TP is unchanged at RM1.80 based on PBV of 3.75x (pegged at -1SD from mean), which implies PER of 18.8x (slightly higher than the +2SD above mean level) for FY20E and 14.9x (at mean) for FY21E. We continue to like SUNCON for its sound fundamentals backed by high order-book (with 3.5 years of earnings visibility), strong balance sheet (net cash of RM406.6m or 31.5 sen per share as of end-Dec 2019) and FY20E dividend yield of 3.3%. Nonetheless, as the share price has risen 24% since our upgrade in late March, we are downgrading our call from OUTPERFORM to MARKET PERFORM.

Source: Kenanga Research - 30 Apr 2020