1HFY21 CNP of RM28.2m came below expectations on weaker-than-expected margins and longer-than-expected lockdown while 1.25 sen dividend declared is in line. Productivity is expected to gradually pick up from 3QFY21 and reach optimum levels in 4QFY21 when all its workers have been vaccinated. YTD replenishment of RM0.616b is within our RM1.5b target. Reduce FY21E/FY22E earnings by 33%/6% after factoring for weaker margins and a slower recovery. Consequently, SoP-TP lowered to RM1.52 (from RM1.60) but MP rating maintained.

Below expectations. 2QFY21 CNP of RM7.8m brought 1HFY21 CNP  to RM28.2m – below our and consensus expectations at 32% and 20% of full-year estimates. The underperformance is attributable to weaker- than-expected construction and precast margins derived from projects with lower margin mix coupled with the higher raw material costs (i.e. steel). In addition, the lockdown that is taking longer than expected to ease has thwarted our recovery projections for 2HFY21. Meanwhile, the declared dividend of 1.25 sen is within our 4.0 sen estimate.

Highlights. 2QFY21 CNP of RM7.8m decreased 62% QoQ mainly due to the drag in revenue (-18%) cause by the FMCO lockdowns which began in June-21. This capped certain critical sites to an operational level of 60% while some sites were totally shut. YoY, 1HFY21 CNP of RM28.2m increased 27% on the back of higher revenue (+64%) due to higher productivity levels from its construction and precast segments. 1HFY21 was less affected by the lockdowns as construction and manufacturing segments were still able to operate (albeit at low productivity) compared to 1HFY20’s inactivity of 2.5 months.

Earnings expectations for 2HFY21. We anticipate 3QFY21 earnings to remain weak due to the low construction productivity experienced throughout July until mid-August 2021. While construction sites are allowed to open starting from 16th August 2021, productivity momentum will only pick up gradually as operating capacity is capped by workers’ vaccinations levels. Currently, 55% of Suncon’s workers are already fully vaccinated while 80% have received their first jab. We expect 4QFY21 to see stronger productivity upon full vaccination of their workers, which would allow 100% operating capacity at sites (based on latest guidelines).

YTD, Suncon has replenished RM616m worth of new jobs in line with our target of RM1.5b (management is targeting RM2b). We foresee further job wins from: (i) its parent company Sunway Group, and (ii) LSS4 to achieve our target. Outstanding order-book of RM4.8b (as of June-21) provides c.2.5x revenue cover.

Reduce FY21/22E earnings by 33%/6%. For FY21E estimates, we reduce: (i) construction and precast margins alongside (ii) lower revenue recognition. As for FY22E, we only reduce its construction margins.

Maintain MP with a lower SoP-derived TP of RM1.52 (from RM1.60) anchored to unchanged 16x FY22E construction earnings and 10x precast earnings. Risks include stricter lockdown measures, lower- than-expected margins, and delay in work progress.

Source: Kenanga Research - 20 Aug 2021