Investment Highlights

• We maintain our BUY call, forecasts and FV of RM2.70 based on 15x FY18F EPS, in line with our benchmark forward PE of 13-15x for mid-cap listed construction companies.

• SunCon’s FY17 core net profit of RM118.9mil (excluding reversal of impairment of RM18.9mil – Al Reem project in Abu Dhabi) missed our and consensus estimates by 18% and 21% respectively. We believe the key variance against our forecast came from the delay in a precast project in FY17, which should not affect its earnings from FY18 onwards.

• The company’s turnover increased 16% YoY driven by good progress work billings for two of its mega projects, i.e. Package V201 of MRT2 and Parcel F of Putrajaya, coupled with the proceeds recognized from the finalization of the earlier Package V4 MRT1. Similarly, its net profit grew 12% YoY on the back of: 1) higher accelerated billings of its ongoing projects; and 2) reversal impairment recognition of RM18.9mil from its Abu Dhabi project.

• These were partially offset by the weaker performance from the precast segment largely due to slow offtakes from key customers (which are only expected to pick up from FY18F) as well as completion of several projects. Nonetheless, precast margins remained stable on reduced expenses following the return of the Tampines plant to the government in 2QFY17.

• We continue to believe that SunCon is well positioned to benefit from upcoming rollouts of infrastructure development projects in the country, of which SunCon has entered into JV partnership with IJM Construction Sdn Bhd-Jalinan Rejang Sdn Bhd-Maltimur Resources Sdn Bhd (equally owns 25% stake in the JV partnership) to participate in the tender for the project delivery partner (PDP) role in the High-Speed Rail project.

• Additionally, its precast business visibility remains upbeat with the recent tie-up with HL Building Materials, (i.e. JV company called HL-Sunway JV Pte Ltd) to supply precast products predominantly to HDB projects in Singapore. Besides, the precast business is expected to pick up in FY18F following to the project delay in FY17.

• Meanwhile, we are keeping SunCon’s job wins assumption of RM2bil annually FY18-20F respectively.

• We continue to like SunCon for: 1) its good earnings visibility backed by a sizeable outstanding order book (Exhibit 2) which will keep it busy for the next 2-3 years; 2) its strong prospects for new job wins underpinned by various mega infrastructure projects, particularly the railrelated ones; and 3) its proven track record with various blue-chip clients in the market.

Source: AmInvest Research - 27 Feb 2018