SUNCON’s 9MFY23 results disappointed due to a slower-thanexpected pick-up in its construction work progress and weaker margins. However, we remain upbeat on the impending roll-out of key public infrastructure projects. We cut FY23F and FY24F earnings by 7% and 6%, respectively, trim our TP by 5% to RM2.26 (from RM2.39) but maintain our OUTPERFORM call.

SUNCON’s 9MFY23 core profit of RM96.1m missed expectations at only 66% and 68% 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. No dividend was declared as expected as it usually pays half-yearly dividend, historically.

YoY, despite 9MFY23 revenue growing 9%, its core profit fell 2% as key new projects were still at their initial stages of construction where profit margins were typically lower. Not helping either was a higher interest cost largely from borrowings to fund its projects in India.

QoQ, its 3QFY23 revenue grew 11% while core profit grew 17% due to higher progress billings from sustainable energy projects as well as the acceleration in work progress of newer projects.

Forecasts. We cut our FY23F and FY24F net profit by 7% and 6%, respectively, to account for lower revenue and margin assumptions as key new projects are still at initial construction stages as mentioned above.

Correspondingly, we reduce our TP by 5% to RM2.26 from RM2.39, based on unchanged 18x FY24F PER, which is in-line with our valuation for big cap construction companies, i.e., GAMUDA (OP; TP: RM5.45) and IJM (OP; TP: RM2.15). Our TP also includes a 5% premium to reflect a 4-star ESG rating as appraised by us (see Page 4).

Outlook. We expect a significant revitalisation of the construction sector in 2024 backed by: (i) the roll-out of the RM45b MRT3 project, RM9.5b Bayan Lepas LRT and six flood mitigation projects reportedly to be worth RM13b, and (ii) the vibrant private sector construction market, underpinned by massive investment in new semiconductor foundries and data centres. SUNCON is eyeing opportunities in data centre building jobs, MRT3 and Bayan Lepas LRT work packages and contracts from parent and sister companies.

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 RM5.79b 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. Maintain 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 - 22 Nov 2023