FCN – Gross margin pressure persists into 2H22F – Update

• FCN announced robust 1H22 new contract value of VND1,981bn with the main contribution from industrial projects (higher gross margin than civil projects).
• We lowered FY22-23F net profit by 47.2%-26.2% due to the impact of high building material prices on the company’s cost of goods sold.
• We lower our 1-year TP to VND16,500 following FY22-23F EPS downgrade.

1H22 results missed because of gross margin contraction
FCN reported 2Q22 revenue shark 36.6% yoy to VND1,039bn while its net profit declined 53.1% yoy to VND15bn. Gross margin was contracted to 10.2% in 2Q22 from 17.5% in 1Q22 following building material prices hike. In addition, interest expense increased by 52.7% yoy in 2Q22 mainly because the debt of Quoc Vinh wind power project was no longer capitalized from 4Q21. For 1H22, revenue rose 14.9% yoy to VND1,541bn and net profit plummeted 84% yoy to VND8bn, fulfilling only 4.0% of our FY22F forecast.
Construction business likely to bottom out
The prolonged Covid-19 pandemic and high price of building materials have delayed construction progress in 2021-1H22. However, we expect the situation to improve in the coming months and FCN’s construction activities to bounce back in 2H22-23F, driven by surging state investment and FDI inflow. FCN has several industrial construction projects in pipeline during 2022-23. Notable projects are Dung Quat Steel Complex 2, Vung Ang 2 & Nhon Trach 3&4 power plants,…
Gross margin pressure to weigh on earnings recovery in FY22F
Due to the increasingly fierce competition of the domestic construction industry and the high building material price environment, we forecast that FCN’s construction gross margin will be only 12.5% in FY22F. Although most of the contracts signed by FCN have a price adjustment clause, we still think that the impact of input materials will significantly affect the company’s gross margin over the rest of 2022.
We revise down FY22-23F net profit forecasts
We revised down our FY22-23F net profit by 47.2%/26.2% to reflect 3.3% pts/1.8% pts lower in gross margin. FCN’s net profit to grow 59.8% CAGR over FY22-23F, driven by current backlog which secures 60% of our forecast. We expect revenue and net profit to grow 24.9%/55.7% yoy in FY22F, respectively. We do not take into account the possibility of FCN’s divestment from its two renewable energy plants. If successful, the two divestment deals will bring about VND150bn to FCN’s net profit over FY22-23F, based on our estimate.
Downgrade to Hold rating with SOTP-based TP of VND16,500
We lower SOTP-based TP of VND16,500 to reflect the FY22-23F EPS downgrade. Upside rating catalysts include (1) higher-than-expected divestment deal value and (2) new land fund from real estate projects. Downside risk is higher-than-expected building materials causing delayed construction progress.

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