9MFY20 CNP of RM44.9m is deemed within our, but slightly below consensus’ aggressive, target. Construction and precast works have fully resumed since Aug 2020 and we expect sequential improvement in the quarters ahead. No changes to our FY20-21E earnings forecast and we maintain OP with an unchanged TP of RM2.45.

Within our estimate but below consensus’. 3QFY20 CNP of RM22.7m* brought 9MFY20 to RM44.9m – deemed within our estimate at 64% but slightly below consensus at 59%. While we expect Suncon to see better profitability of RM25m in 4QFY20, we think consensus FY20 CNP forecast of RM76m is slightly aggressive - implying RM31m for 4QFY20 which is pre-Covid-19 level. We think it is more prudent to expect profitability level to normalise only from FY21. No dividends as expected. Note that the re-imposed CMCO on October 14 has minimal work disruption according to management.

*3QFY20 CNP adjusted for reversal of: (i) RM9m of staff bonus previously recognised in 2019, (ii) disposal gains of RM3.7m, (iii) receivable impairments worth RM5.0m, (iv) FX loss of RM2.5m, (v) goodwill impairment of RM3.6m, and (vi) FV loss of RM0.1m.

Results’ review. 3QFY20 CNP of RM22.7m surged 395% QoQ as the quarter was not disrupted by a 2-month MCO as in 2QFY20.

Dissecting 3QFY20 further, Suncon’s construction revenue bounced back to pre-pandemic level as work progress resumed. That said, PAT margin of 5.7% is still lower than pre-pandemic levels probably due to the stricter SOP compliance. Meanwhile, 3QFY20 precast revenue was still below the normalised levels as works only fully resumed in mid- August – hence, Suncon only experienced half a quarter worth of optimum precast deliveries. YoY, 9MFY20 CNP of RM44.9m was down 53% mainly from MCO lockdowns.

Achievements. YTD, Suncon has secured RM2.3b worth of contracts – exceeding initial projections of RM2.0b. While management guides for no other contracts for the remainder of the year, we keep our FY20E replenishment target of RM2.5b unchanged (upgraded back in Oct 2020) to cater for unexpected wins potentially from (i) precast segment or (ii) rooftop solar projects.

For FY21E, our replenishment target is pegged at RM2.0b backed by an existing tender-book of RM5.3b with replenishment prospects coming from: (i) LSS4, and (ii) further housing projects i.e. Sunway Valley City, Penang. Current outstanding order-book of RM5.3b (as of Sept 2020) provides c.2.5x revenue cover.

Minimal collection risk. Contrary to belief that the Covid-19 pandemic would lead to higher receivables, we highlight that Suncon’s 3QFY20 total receivables of RM820m is in a relatively healthy position vis-à-vis previous quarters and receivables past due of RM80m are actually lower than that in 2019 (refer chart 1) – indicating low collection issues. That said, the RM5m impairment registered this quarter was from a single client that will not be recurring moving forward.

No change to our earnings forecast post results.

Maintain OUTPERFORM with an unchanged SoP-derived TP of RM2.45 based on a construction PER of 18x (+1SD above its 5-year mean). We think our premium PER valuations is justified vs. other contractors given Suncon’s low risks profile from the receivable, replenishment, and execution perspectives – the three key risks that really matter to a contractor.

Source: Kenanga Research - 20 Nov 2020