SUNCON’s 9MFY22 results met expectations. YTD, it has secured RM882m worth of new jobs and it is tendering for sizeable building jobs for data centres/semiconductor factories which could be worth as much as RM1-1.5b each. Meanwhile, its labour issue has eased with the arrival of 342 workers. Following the recent weakness in its share price, we upgrade SUNCON to OUTPERFORM (from MARKET PERFORM) with an unchanged SoP-based TP of RM1.60.

Within expectations. 9MFY22 core net profit of RM91m came within expectations at 71% and 69% of our full-year forecast and the full-year consensus estimates, respectively.

9MFY22 revenue rose 50% YoY while core net profit gained 90% from a low base during the pandemic-stricken period a year ago.

Outlook. YTD, Suncon has replenished RM882m 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 that could fetch contract values of RM1.0b-1.5b per job (active tenders stood at RM17.7b as of 3QFY22). Thus, we keep our RM1.5b replenishment target unchanged.

In terms of labour requirements, SUNCON has managed to secure a quota to bring in 400 Indonesian workers back in June 2022 which would increase their total labour count to c.600 workers. Thus far, 342 workers have arrived which would enable SUNCON to execute its outstanding order book of RM4.0b smoothly.

Meanwhile, its Singapore Integrated Construction and Prefab Hub (ICPH) is expected to be commissioned in Dec 2022. We expect the depreciation of this plant to weigh 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 before the plant contribute meaningfully.

Forecasts. Keep FY22-23F earnings unchanged post results.

In view of the recent weakness in share price, we upgrade SUNCON to OUTPERFORM (from MARKET PERFORM) with an unchanged SoP-derived TP of RM1.60 based on 16x PER for its construction segment. We like SUNCON for: (i) its strong replenishment pipeline from parent SUNWAY, (ii) its dominant position in the local construction space with extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works, and (iii) its strong balance sheet that allows them to participate in deferred payment model projects. We accord a 5% premium to its TP given a 4-star ESG rating as appraised by us (see Page 5).

Risks to our call include: (i) sustained weak flows of construction jobs from 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 - 23 Nov 2022