Results Review

• Stripping off the one-off impairment loss on financial assets, SUNCON’s FY23 core earnings of RM169.8mn (+15.4% YoY) beat both ours and the street’s expectations, accounting for 126.6% and 121.3% of full-year estimates, respectively. The positive variation was due to higher-thanexpected revenue recognition from new projects. 

• A second interim dividend of 3.0 sen (vs 2.5 sen in 4Q22) was declared. This brings the total dividend for FY23 to 6.0 sen (vs 5.5 sen in FY22), translating to a payout ratio of 53%. 

• YoY, SUNCON’s full-year revenue and PBT improved by 23.9% and 2.5%, to RM2,671.2mn and RM188.6mn, respectively. This growth was largely driven by increased contributions across all business segments. Notably, the construction segment's revenue surged 20.6% YoY, thanks to accelerated revenue recognition from new projects. However, the segmental PBT slightly declined by 2% YoY, as the preceding year's margin was boosted by the finalisation of accounts for a few projects. Additionally, the precast segment's revenue and PBT saw significant increases of 59.8% and 74.8% YoY, respectively, attributed to higher production at the integrated construction & prefabrication hub (ICPH) facility in Singapore and increased contributions from new projects. 

• QoQ, 4QFY23 revenue rose 29.4% to RM871.5mn and core earnings nearly doubled to RM73.7mn. The improvement was mainly attributed to: (i) higher contribution from sustainable energy projects and new projects in the construction segment, and (ii) increased production at the ICPH facility in Singapore.

Impact

• We raise our FY24 and FY25 earnings estimates by 13.9% and 11.2% to RM181.8mn and RM198.4mn, respectively, after factoring in higher job replenishment assumptions of RM2.8bn p.a. (previously RM2.5bn p.a.). We forecast FY26 net profit to grow by 10% YoY to RM218.2mn, supported by a job replenishment assumption of RM3.0bn.

Outlook

• In FY23, the group successfully secured RM2.5bn of new contracts, surpassing management’s order book replenishment target of RM2.0bn but within our assumptions of RM2.5bn. As of end-December 2023, the group’s outstanding order book stood at RM5.3bn, which translates to 2.0x FY23 revenue. Additionally, the group has an active tender book with a total value of around RM26.2bn. 

• Looking ahead, the group aims to secure new projects within a range of RM2.5bn to RM3.0bn in FY24. It will continue to explore more opportunities in niche segments such as data centres, semiconductor factories, renewable energy and warehouses.

Valuation

• We believe SUNCON is poised to gain substantially from upcoming mega infrastructure projects and has the potential to seize opportunities in the expanding data centre market and sustainable energy segment. We assign SUNCON a higher PER of 18x, anticipating solid earnings visibility supported by strong job replenishment in the near term. Taking the opportunity to roll forward our base year valuation to CY25, we arrive at a new target price of RM2.76 (up from RM1.73 previously). Upgrade SUNCON to Hold.

Source: TA Research - 21 Feb 2024