1QFY21 CNP of RM20.3m (-46% QoQ; +16% YoY) is deemed below expectation as the recovery earlier anticipated by us for the remainder of FY21 has been pushed back. Hence, we dial down FY21E/FY22E earnings by 23%/9% after factoring: (i) lower FY21E replenishment of RM1.5b, (ii) deferred recognitions at India and Singapore operations, and (iii) lower margins given the persistently high steel prices. Consequently, SoP-TP is lowered to RM1.85 (from RM2.10) but OP rating maintained.

Below expectations. The resurgence of Covid-19 cases (in Malaysia, Singapore and India), has weakened our earlier case anticipating a recovery for the remainder of FY21. Hence, even though 1QFY21 CNP of RM20.3m is what we had earlier expected i.e. slightly subdued at 15/14% of our/consensus estimates due to reduced productivity from MCO 2.0* – we now deem it below expectation as the earlier expected recovery ahead is pushed further back. No dividends as expected.

*MCO 2.0 lasted from 13th January till 4th March 2021. During this period, Suncon had productivity of 50-80% as they strictly complied with the SOPs.

Highlights. 1QFY21 CNP of RM20.3m decreased 46% QoQ on lower revenue (-27%) as progress and deliveries in its construction and precast divisions were down. This was mainly due to the impact from MCO 2.0 that resulted in sub-optimal productivity while 4QFY20 had run at full productivity. YoY, on the back of a higher revenue (+24%), 1QFY21 CNP increased 16% from a low base as 1QFY20 was affected by a 2-week total work stoppage during MCO 1.0.

YTD, Suncon has replenished RM462m of new jobs with pre-cast contributing RM185m and the balance comprising in-house jobs. Outstanding order-book of RM5.0b (as of Mar 2021) provides c.2.5x revenue cover.

Immediate outlook has changed. With the persistently high Covid-19 cases in Malaysia, surge of cases in India, re-imposed lockdown in Singapore coupled with unabating high steel prices, our earlier assumptions for a strong recovery year in FY21 is less likely to materialise now.

In view of this, we opt to (i) lower our FY21E replenishment target to RM1.5b (from RM2.0b) in anticipation for a slower roll out of public projects, (ii) defer construction recognition for their 2 Indian projects worth RM0.8b, (iii) trim precast delivery progress at Singapore and (iv) tweak overall margins lower. Consequently, we reduce FY21/22 earnings by 23%/9% respectively.

Call and TP. Post 1QFY21 earnings, we roll our valuation base year forward to FY22 deriving a lower SoP-TP of RM1.85 (from RM2.10). Our new TP is substantially lower with the net cash component of RM360m removed from the valuation. This is in tandem with the commencement of the Indian highway projects (under the hybrid annuity model) which will require Suncon to provide financing for the projects – turning it from net cash to a net debt position. OP rating maintained.

Risks include a continuous rise of Covid-19 cases, lower-than expected margins, and delay in work progress.

Source: Kenanga Research - 21 May 2021