SUNCON’s FY23 results beat expectations on robust progress billings during the final quarter. It raised its guidance for new job wins in FY24 to RM3b (from RM2.5b). We maintain our FY24F earnings forecast and project a 33% earnings growth in FY25F. We lift our TP by 33% to RM3.00 (from RM2.26). Maintain OUTPERFORM.

SUNCON’s FY23 core profit of RM170.1m beat our forecast and the consensus estimate by a whopping 25% and 22%, respectively. The variance against our forecast came largely from stronger-than-excepted progress billings during 4QFY23. It declared a 2nd interim NDPS of 3.0 sen (ex-date: 14 Mar; 09 Apr), bringing FY23 NDPS to 6.0 sen against 5.5 sen paid in FY22 and our FY23 assumption of 5.0 sen.

YoY, its FY23 revenue leapt 24% to RM2.67b largely due to higher revenue recorded in 4QFY23, attributable to accelerated progress in newer projects. As such, its FY23 core profit grew 18% to RM170.1m. Note that its interest cost jumped 91% to RM26.4m, largely from borrowings to fund its projects in India.

QoQ, its 4QFY23 revenue soared 29% while core profit almost doubled to RM74.0m due to higher progress billings from sustainable energy projects as well as the acceleration in work progress of newer projects. The RM74.0m core profit was largely adjusted for RM23.3m impairment for receivables from a reported net profit of RM49.3m.

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) 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 Bayan Lepas LRT work packages, and contracts from parent and sister companies. Against this backdrop, it raised its guidance for new job wins in FY24 to RM3b (from RM2.5b).

Forecasts. We maintain our FY24F net profit forecast (as we have already assumed RM3b new job wins in FY24F). We project a 33% earnings growth for FY25F based on a job win assumption of RM3.5b.

Valuations. We upgrade our TP by 33% to RM3.00 (from RM2.26) as we roll over our valuation base year to FY25F (from FY24F) with an unchanged 18x forward PER, which is in-line with our valuation for big cap construction companies, i.e. GAMUDA (OP; TP: RM5.45) and IJM (OP; TP: RM2.31). Our TP also includes a 5% premium to reflect a 4- star ESG rating as appraised by us (see Page 4).

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 RM5.50b 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 - 21 Feb 2024