SUNCON’s 1HFY23 results disappointed due to a slower-than expected pickup in its construction work progress and weaker margins. We remain optimistic on SUNCON given the imminent roll-out of key public infrastructure projects post the recent state elections. We cut FY23-24F earnings forecasts by 11-5%, trim our TP slightly to RM2.12 (from RM2.13) but maintain our OUTPERFORM call.

SUNCON’s 1HFY23 core profit of RM58.2m missed expectations at only 36% and 39% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from a slower-than-expected pickup in its construction work progress and weaker margins.

It declared an 1st interim NDPS of 3.0 sen (ex-date: 11 Sept; payment date: 27 Sept) in 2QFY23, which matched the 3.0 sen NDPS paid in 2QFY22.

YoY, its 1HFY23 revenue fell 5% to RM1.13b while core profit contracted 20% to RM58.2m as key new projects were still at their initial stages of construction. Meanwhile, high interest cost which jumped from RM4.3m to RM19.7m also impacted earnings negatively. The higher borrowing was to fund its India projects at higher progress stages.

QoQ, its 2QFY23 revenue rose 16% to RM604.1m while core profit grew 25% to RM32.3m. This was due to higher progress billings from sustainable energy projects as well as the acceleration in work progress of newer projects.

Outlook. We expect a significant revitalisation of the construction sector in 2HCY23 backed by: (i) the roll-out of the RM45b MRT3 project and six flood mitigation projects reportedly to be worth RM13b, and (ii) an accelerated disbursement of the massive RM97b gross development expenditure budgeted under Budget 2023 (+35% YoY over RM71.6b a year ago). Similarly, the private sector construction market is vibrant underpinned by massive investment in new semiconductor foundries and data centres. Meanwhile, SUNCON’s current outstanding order book stands at RM5.8b (of which RM1.5b was secured during the year) while its active tender book stands at RM27.0b comprising data centre building jobs, MRT3 work packages and contracts from parent and sister companies.

Forecasts. We cut our FY23-24F net profit forecasts by 11-5% to account for lower revenue and margin assumptions as key new projects are still at initial construction stages as mentioned above.

As we also roll forward our valuation base year to FY24F (from FY23F), the downgrade in TP is negligible by only 0.5% to RM2.12 (from RM2.13). We value SUNCON at 16x FY24F PER, at the upper range of our target forward PER for mid-sized and large contractors given SUNCON’s large market capitalisation and strong track record in mega infrastructure projects. Our TP carries a 5% premium by virtue of its 4- star ESG rating as appraised by us (see Page 4).

We like SUNCON for: (i) its strong replenishment pipeline from parent SUNWAY, (ii) its dominant position in the local construction space with extensive capabilities 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. Maintain OUTPERFORM.

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 - 24 Aug 2023