SUNCON’s 1HFY22 results met expectations. YTD, it has secured RM563m worth of new jobs. It is tendering for sizeable data centres/semiconductor factory jobs which could fetch replenishment of RM1-1.5b per contract. Meanwhile, the labour issue is easing with the arrival of 400 workers by year end to cope with their RM4.2b order book. Increase TP by 5% to RM1.60 (from RM1.52) to reflect a 4- star ESG rating. Maintain MARKET PERFORM.

Within expectations. 1HFY22 CNP came in within expectations at 52% and 49% of our and consensus full-year forecast respectively.

1HFY22 revenue rose 42% YoY while CNP more than doubled from a low base during the pandemic-stricken same period a year ago.

Outlook. YTD, Suncon has replenished RM563m worth jobs against our full-year assumption of RM1.5b and the company’s internal FY22 target of RM2.0b. While the company appears to be trailing our assumption and its own target, we are not perturbed as it is currently tendering for a number of data centre/semiconductor factory jobs by MNC clients which could fetch contract values of RM1.0b-1.5b per job. For these data centre/semiconductor jobs which have better margins compared to conventional construction contracts, SUNCON is entering these tenders with international JV partners in which SUNCON intends to hold 70-80% stake within the consortium. Thus, we keep our RM1.5b replenishment target unchanged.

In terms of labour, SUNCON has managed to secure a quota to bring in 400 Indonesian workers which would increase their total labour count to c.600 workers. These 400 workers are expected to come in throughout the remainder of the year with the first 100 workers to join by early September. Consequent to the additional labour, SUNCON would be able to execute its existing outstanding orderbook of RM4.2b smoothly.

Meanwhile, its Singapore Integrated Construction and Prefab Hub (ICPH) will commence operations soon. Nonetheless, expect the depreciation of this plant to weight on precast division’s earnings up until end-FY23 as the group would need to sort out the teething issues before it can ramp up utilisation to have the plant contribute meaningfully.

Forecast. Keep FY22/23F earnings unchanged post results.

Maintain MP with higher SoP-derived TP of RM1.60 (from RM1.52) after adjusting TP by +5% on a 4-star ESG rating as appraised by us. We ascribed a construction PER of 16x to SUNCON – at the upper range of our coverages ascribed 9 to 18x PER for contractors’ given SUNCON’s strong backing from parent SUNWAY and its dominant position within the local construction space with extensive capabilities and track record in building, infrastructure, solar and mechanical, electrical and plumbing (MEP) works.

Risks to our call include: (i) sustained weak flows of construction jobs from both the public and private sectors; (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD); and (iii) rising cost of building materials.

Source: Kenanga Research - 24 Aug 2022