SUNCON’s 1HFY24 result met expectations with core profit rising 11% YoY to RM64.2m on higher revenue. 2HFY24 earnings are set to be stronger as data centre projects accelerate. Its prospects remain strong underpinned by a record order backlog and promising jobs prospects from both public and private projects.

We maintain our forecasts and TP of RM4.28 but cut our call to MP as it is fairly valued at 20x FY25 PER after its recent solid share price performance.

SUNCON’s 1HFY24 core profit of RM64.2m came in at only 36%/34% of house/street’s full-year estimates. However, we consider the results within expectations as we expect strong 2HFY24 ahead as progress billings (especially from data centre projects) accelerate. It declared 1st interim NDPS of 3.5 sen (ex-date: 11 Sep; payment date: 26 Sep) in 2QFY24, which is higher than that of 3.0 sen paid in 2QFY23.

YoY, its 1HFY24 core profit rose 11% to RM64.2m on the back of 12% hike in revenue due to the peak construction progress in several projects. The earnings were partly softened by a higher finance cost (+72% or RM14.3m) which was largely to fund its India project.

QoQ, its 2QFY24 core income jumped 38% to RM37.2m owing to higher revenue (+8% due to the acceleration progress in building and data centre projects) as well as improved construction margin.

Outlook. We expect a significant revitalisation of the construction sector backed by: (i) the roll-out of the RM45b MRT3 project in 2024/2025, RM10b Bayan Lepas LRT and several flood mitigation projects reportedly to be worth RM13b, and (ii) a vibrant private sector construction market, backed by massive investment in new semiconductor foundries and data centres. SUNCON is eyeing opportunities in data centre building jobs, MRT3 and Penang LRT Mutiara Line work packages, and contracts from parent and sister companies.

Forecasts. Maintained. We assume annual job wins of RM4.5b for FY24 and RM4.0b for FY25 vs. its guided RM4b-RM5b per year.

Valuations. We maintain our TP of RM4.28 based on 20x FY25F PER, which is in-line with our valuation for big cap construction companies, i.e. GAMUDA (UP; TP: RM7.29) and IJM (MP; TP: RM3.00). Our TP also includes a 5% premium to reflect a 4-star ESG rating as appraised by us (see Page 5). For earnings and TP sensitivity, FY25F EPS would rise 2.3% and TP by 10 sen for every RM100m increase in its FY25 order book Investment case. We like SUNCON for: (i) strong job prospects of the sector as a whole with the imminent roll-out of key public infrastructure projects, (ii) its strong earnings visibility underpinned by RM7.4b outstanding order book and recurring jobs from parent and sister companies, and (iii) its extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works. However, the stock is fairly valued after the solid share price performance in the past two months. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our recommendation include: (i) 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 Aug 2024