SUNCON’s FY22 earnings beat expectations on stronger-than expected margins registered in 4QFY22. Its construction job win prospects are bright underpinned by the MRT3 project and more data centre building jobs. Its precast division will be buoyed by margin recovery on lower steel prices. We maintain our FY23F earnings forecast, TP of RM2.13 and OUTPERFORM call.

Above expectations. FY22 core net profit of RM137m beat our forecast and consensus estimate by 7% and 9%, respectively. The variance against our forecast came largely from stronger-than-expected margin in 4QFY22 on lumpy profit recognition on account finalisation for completed projects. Meanwhile, its full-year dividend of 5.5 sen (2.5 sen declared in 4Q) also came above our 5.0 sen forecast.

FY22 revenue rose 25% YoY while core net profit gained 23% from a low base during the pandemic-stricken period a year ago.

Outlook. In FY22, SUNCON secured RM8.6b worth of jobs (of which RM6b is an interim agreement for a Vietnamese coal fired power plant pending financial close before a definitive agreement can be signed) bringing outstanding order book to a high of RM11.3b. For FY23, replenishment prospects are bright underpinned by: (i) MRT3, (ii) Johor Bahru – Singapore Rapid Transit System (RTS), and (iii) more data centre building jobs. We have penned in a FY23F replenishment rate of RM2.2b, slightly higher than the company’s target of RM2.0b.

Its precast division’s margins are expected to remain healthy at >5% moving forward as newer contracts secured have better margins while steel prices (a major cost component) have declined. Meanwhile, its Singapore Integrated Construction and Prefab Hub (ICPH) has commenced operations in Jan 2023. Nonetheless, we only expect optimum utilisation rate in FY24 as the group would need to sort out teething issues before it can fully ramp up the plant to contribute meaningfully.

In terms of labour requirement, SUNCON has brought in 394 workers out of its quota for 400 secured back in Jun 2022 raising its current labour count to c.600. It has applied to bring in another 600 workers, out of which 300 have been approved by the government in Jan 2023.

Forecasts. Despite the outperformance in FY22, we keep FY23F earnings unchanged, on less saving to be recognised this year with lower number of projects reaching completion. Meanwhile, we introduce FY24F earnings of RM172m supported by a replenishment of RM2.2b.

Maintain OUTPERFORM with an unchanged TP of RM2.13 based on 16x PER. 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 it 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 4).

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 - 22 Feb 2023