SUNCON's 9MFY24 result fell short of expectations with core profit making up 55% of our FY24 forecasts, due to higher proportion of low margin in-house projects in 3QFY24. However, strong set of 4QFY24 and FY25 results are anticipated as data centre projects accelerate. We cut FY24/FY25F earnings by 11%/4% to reflect weak 3QFY24 margin. SUNCON remains MP with a lower TP of RM4.52.

3QFY24 disappointed. SUNCON reported 9MFY24 results which came below expectations with core profit of RM98.5m making up only 55%/56% of house/street's full-year estimates. This was due to lower-than-expected profit margin registered in 3QFY24 at 4.0% at core profit level as it recognised higher proportion of in-house projects which came with lower margin. On a surprising note, it declared a 2nd interim NDPS of 2.5 sen (ex-date: 10 Dec; payment date: 26 Dec) in 3QFY24 as compared to its usual half-yearly payment which in our view could be for tax planning purposes before the 2% dividend tax in 2025. This brings YTD NDPS to 6.0 sen vs. FY23 full-year of 6.0 sen as well.

Low margin in-house project impacted sequential result. Despite higher revenue by 33% QoQ to RM865.3m due to the accelerated progress of data centre projects, 3QFY24 core profit fell 8% to RM34.2m due to the higher proportion of progress recognition for in-house projects which came in with lower margin. On the other hand, high effective tax rate of 31.0% was reported vs. 24.8% in the preceding quarter, mainly due to higher Indian tax rate for its India highway projects Stronger YoY results on higher orderbook. 9MFY24 revenue rose 18% to RM2.12b, thanks to higher progress claims on the back of record high orderbook. Its outstanding orderbook currently stands at RM7.1b with RM3.96b new jobs secured YTD, against RM5.3b outstanding orderbook as of end-2023 with a total of RM2.5b new jobs secured in 2023. However, its core profit only inched up 3% to RM98.5m given the abovementioned low margin in-house job recognition.

Outlook. We expect a significant revitalisation of the construction sector backed by: (i) the finalisation of RM10b Bayan Lepas LRT, Pan Borneo Sarawak & Sabah Highway and several flood mitigation projects, 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, Penang LRT Mutiara Line work packages, and contracts from parent and sister companies.

Forecasts. We trimmed FY24 and FY25 earnings by 11% and 4%, respectively, as we adjusted (i) construction EBIT margin to 7.0% and 7.5% from 8% previously, and (ii) effective tax rate to 27% from 24% for FY24 but made no changes to FY25 of 24%. Nonetheless, our annual job wins are maintained at RM4.5b and RM4.0b, for FY24 and FY25, against guided RM4b-RM5b per year. FY24-FY25 NDPS are also maintained at 6.0 sen.

Valuations. Post earnings revision, our TP is reduced by 7% to RM4.52 from RM4.71, based on unchanged 22x FY25F PER, which is in-line with our valuation for big cap construction companies, i.e., GAMUDA (UP; TP: RM10.80) and IJM (MP; TP: RM3.16). 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. MARKET PERFORM reaffirmed.

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 - 22 Nov 2024