FY21 CNP of RM127.2m exceeded expectations as the group recalibrated construction margins higher for jobs nearing completion that have higher profit visibility. In tandem with the earnings outperformance, the 5.25 sen dividend is also higher than our 4.0 sen estimate. Moving forward, we anticipate the jobs replenishment landscape to be tough with less government and private job rollouts. Hence, we only target FY22E replenishment of RM1.5b – lower than management’s RM2.0b guidance. Maintain MP with unchanged TP of RM1.52 anchored to 16x FY22E construction PER.

Exceeded expectations by a mile. 4QFY21 CNP of RM74.4m brought FY21 CNP to RM127.2m – way above our/consensus expectations at 145%/158% of estimates. The outperformance stems from stronger- than-expected construction EBIT margin (of 14.2% in 4QFY21 vs. typically 5-8%) as the group recalibrated project margins higher for projects nearing completion that have higher profit visibility. By imputing recalibrating margins higher, unrecognised earnings from prior quarters (due to lower ascribed margins) are all recognised in 4QFY21 – which explains the bumper margins. Management guided that most of the margin recalibrations has been done this quarter and margins will normalise moving into the subsequent quarters.

In tandem with the bottom-line outperformance, a 4.0 sen dividend was declared which lifted YTD dividends to 5.25 sen – above our 4.0 sen full-year estimate.

Highlights. 4QFY21 CNP of RM74.4m increased 203% QoQ mainly due to: (i) higher revenue (+130%) in the absence of lockdowns, and (ii) recalibration of profit margins as explained above. Similarly, FY21 CNP of RM127.2m increased 54% on the back of: (i) higher revenue (+11%) due to higher productivity from less stringent lockdowns, and (ii) stronger EBIT margins (+2.4ppt) as management was prudent with earnings recognition in FY20 due to the pandemic uncertainties then.

For FY21, Suncon replenished RM1.474b worth of new jobs, within our RM1.5b target but below their internal RM2.0b target. For FY22, we are targeting RM1.5b worth of new replenishments while management targets RM2.0b. Outstanding order-book of RM4.8b (as of Dec 2021) provides c.2.5x revenue cover.

We foresee replenishment prospects being more challenging for the group given slower job rollouts from the Malaysian government amidst a more competitive landscape (as contractors have to compete for a reduced pool of jobs). Suncon will have to be more reliant on their parent company for contracts. Meanwhile, Suncon will see the commissioning of their 49%-owned Singapore precast plant in Aug 2022 which would increase Suncon’s precast capacity to 200k m3/annum (currently 126k m3/annum from their two Johor plants). That said, we only anticipate earnings contributions to kick in gradually in FY23 as we anticipate teething and start-up expenses in the first six months.

Keep FY22E earnings unchanged despite the outperformance as our FY22E EBIT margin assumption is already at a normalised level of 8%. We introduce FY23E earnings of RM127m - flat YoY as we foresee construction margins deteriorating slightly in lieu of competitive landscape while precast margins strengthen from the ramp-up of their new Singapore plant.

Maintain MP with unchanged SoP-derived TP of RM1.52 anchored to unchanged 16x FY22E construction earnings and 10x precast segment earnings.

Risks include lower-than-expected margins, and delay in work progress.

Source: Kenanga Research - 24 Feb 2022