Results Review

• SUNCON reported 1QFY24 core earnings of RM32.3mn, which came in at 17.0% and 17.8% of ours and consensus’ full-year estimates, respectively. However, we consider the results to be within expectations, as we anticipate stronger earnings in the next few quarters due to higher progress billing from newer projects.

• 1QFY24 revenue surged by 15.8% YoY, driven by growth across all divisions: (i) construction division (+15.9% YoY), and (ii) precast division (+15.5% YoY). The improvement was propelled by higher billing from newer construction projects and increasing contributions from the integrated construction and prefabrication hub in Singapore. In line with the top-line expansion, SUNCON registered a PBT growth of 11.0% YoY.

• However, sequential PBT declined by 31.5% QoQ to RM41.6mn, attributed to lower contributions from both the construction and precast divisions. The immediately preceding quarter's results were boosted by accelerated progress in building and sustainable energy projects, efforts to achieve scheduled milestones for certain construction projects, and higher contributions from projects near-completion for the precast division.

• SUNCON has secured RM1.7bn of new contracts in 1Q24 and is aiming to replenish its order book by RM2.5bn to RM3.0bn this year.

Impact

• After performing some housekeeping on our earnings model, we tweak our FY24/25/26F earnings forecasts upward by 0.2%/2.0%/3.7%, respectively.

Outlook

• As of the end-March 2024, the group's outstanding order book stood at RM6.3bn, translating to 2.4x FY23 revenue. The group’s growth trajectory is expected to remain robust, supported by a strong outlook in advanced technology projects (ATP) such as data centres, semiconductor factories, renewable energy projects, and warehouses, along with the potential rollout of domestic mega infrastructure projects.

• Additionally, we believe SUNCON could benefit from the Johor government’s initiative to implement an autonomous rapid transit (ART) system in Johor Bahru to alleviate traffic congestion. This new project is estimated to cost RM7bn, which is 58% lower than the cost of building a light rail transit (LRT) line. SUNCON is a strong contender for this ART project, leveraging its proven track record with the construction of the elevated Bus Rapid Transit Sunway Line completed in 2015 with a project value of RM452mn.

Valuation

• Following the earnings revision, we arrive at a new TP of RM3.79, based on a higher target PER of 22x CY25 EPS (from 19x previously). This adjustment reflects a reduced discount of 10% from 15% to the average target PER of 24x of the big cap construction players under our universe coverage. That said, we believe that the valuation is fair given the following factors: (i) SUNCON’s strong position as a contender for mega infrastructure projects, namely MRT3, Johor ART and Penang LRT, (ii) strong earnings visibility on the back of a robust outstanding order book, (iii) potential new earnings driver from power plant project in Vietnam, and (iv) its leading position in securing more jobs in the thriving ATP industry. Maintain Buy call on the stock.

Source: TA Research - 21 May 2024