We held a virtual meeting with SUNCON recently and felt that many headwinds still persist for the group. The high inflationary environment coupled with shortage of labour would exert an undesirable impact towards ongoing and newly secured jobs. In addition, due to the lull of jobs during the pandemic period, replenishment has been tough given the current competitive landscape. That said, profitability for the group in FY22 should still be able to achieve management’s 5- 8% EBIT margin guidance as prudent recognition from jobs reaching completion should see upward revision upon accounts finalisation. Maintain MP with unchanged TP of RM1.52.

YTD replenishment of RM266m (of which RM128m is from precast and RM100m from RTS piling) is trailing behind out RM1.5b target and management’s RM2.0b target. Management’s RM2b target is divided evenly among: (i) precast, (ii) buildings, (iii) in-house works i.e. from SUNWAY, and (iv) Infra/India. Current key tenders include the RTS CIQ superstructure (c.RM400m value). Nonetheless, management reveals that tenders are extremely competitive for this package.

Keen to secure MRT3’s elevated portions. This includes Civil package 1 (6km elevated section + main depot) and Civil package 2 (27km elevated + 1.2km on ground tunnel). We estimate that the Civil package 1 and 2 are worth c.RM2.5b and RM12b, respectively, based on contract costs extrapolated from MRT2. However, in order to participate, the tendering consortium must have 60% Bumiputera shareholding – hence, Suncon will require a JV partner for these jobs.

SUNCON’s Singapore precast plant (ICPH) is on track to commence operations in Aug 2022 with 75k m3 capacity (currently at 125k m3). Management reveals that the plant would require RM300-500m/annum revenue for full utilisation.

Their two India projects (cumulatively worth RM818m) have commenced construction. Upon completion of these two contracts, we expect SUNCON’s net cash position will swing into a net gearing of c.0.05x. SUNCON is internally comfortable with a net gearing of 0.5x.

Severe labour shortage. Currently SUNCON only has 260 direct workers (compared to 800 at the peak and 500 during the pandemic stage). Although execution progress for the group is not affected, it will require additional costs for additional subcontractors – translating to margin erosion. Suncon intends to secure another 700 direct workers but notes that it would be tough to get the quota.

Current high steel prices of RM3,400/t and cement prices of RM350/t will erode margins from ongoing construction projects and more so for its precast division.

High solar panel costs have halted the progress of SUNCON’s two existing solar contracts (worth c.RM300m). The concessionaires (which awarded Suncon the contracts) are trying to renegotiate with TENAGA for an extension of concession period to ride out this high price period and wait for panel prices to drop – so that the initial IRRs can be maintained.

Despite the challenges, SUNCON still guides 5-8% EBIT margins for FY22. The margin compression from high building material costs and labour shortages will be supplemented by upward margin adjustments for contracts completing this year (upon account finalisation) given that SUNCON has been prudent with margin recognition for ongoing projects all this while. Keep earnings forecast unchanged and maintain our MP call with TP of RM1.52.

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

Source: Kenanga Research - 9 May 2022