9MFY21 CNP of RM52.7m exceeded expectations as the group recalibrated construction margins higher for certain jobs nearing completion. Meanwhile, we are expecting 4QFY21 to come in strong given the absence of lockdowns and activities back at full swing. YTD replenishment of RM796m is still in-line with our RM1.5b target, with outstanding order-book currently at RM4.7b. Increase FY21E earnings by 50% on higher construction margins but keep FY22E earnings unchanged. Maintain MP with unchanged TP of RM1.52 anchored to 16x FY22E construction PER.

Exceeded expectations. 3QFY21 CNP of RM24.6m brought 9MFY21 CNP to RM52.8m – above our/consensus expectations at 90%/67% of full-year estimates. The outperformance stems from stronger-than-expected construction EBIT margin (of 9.5% in 3QFY21 vs. typical 5- 8%) as the group recalibrated project margins higher for certain projects nearing completion that have higher certainty of profits to be recognised. By imputing higher margins, unrecognised earnings from prior quarters (due to lower margins being ascribed) are imputed in 3QFY21 numbers. Meanwhile, no dividend was declared as expected.

Highlights. 3QFY21 CNP of RM24.6m increased 214% QoQ mainly due to: (i) recalibration of profit margins as explained above, and (ii) 2QFY21 dragged down by a one-off bank upfront charge of RM5.7m as Suncon reached financial close for two of its Indian Highway project. Net cash level* of RM390m (+RM172m from 2QFY21) remains healthy as Suncon received a sizeable payment for its LRT3 progress work during the quarter.

Net cash* includes money market funds parked under investment in associate in Suncon’s balance sheet.

YoY, 9MFY21 CNP of RM52.8m increased 18% on the back of higher revenue (+19%) due to higher productivity from its construction and precast segments. 9MFY21 was less affected by the lockdowns as both segments were still able to operate (albeit at lower productivity) compared to 9MFY20’s inactivity of 2.5 months.

Earnings outlook for 4QFY21. We anticipate 4QFY21 earnings to come in strong at c.RM35m in the absence of lockdowns and operations being back at full swing as all their workers have been fully vaccinated. Note, Suncon’s construction arm has been operating at 100% since early-September while its precast segment has been operating at 100% since late-September.

YTD, Suncon has replenished RM796m worth of new jobs, in line with our target of RM1.5b (management is targeting RM2b). Despite with 1.5 months left till year-end and c.RM700m to be secured to meet our target, we keep our target unchanged as we foresee job wins from: (i) its parent company, (ii) LSS4 worth RM360m, and (iii) some external building jobs. Outstanding order-book of RM4.7b (as of Sept 2021) provides c.2.5x revenue cover.

Increase FY21E earnings by 50% to RM88m after imputing higher margins for its construction segment attributable to the recalibrated construction margins. Meanwhile, we keep FY22E earnings unchanged despite the outperformance as our FY22E EBIT margin assumption is already at a normalised level of 8%.

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

Source: Kenanga Research - 19 Nov 2021