Results

• SunCon reported 3QFY15 results with revenue of RM450m and earnings of RM26m. This brings 9M earnings to RM98m.

• On a QoQ basis, revenue fell 10% due to: (i) timing gap as older jobs approached completion while new ones have yet to commence; and (ii) lower delivery of precast products as per clients’ schedule. Earnings fell by a steeper 32% QoQ given margin compression as a result of cost incurred for variation orders without offsetting revenue as the works have not been certified. There is no YoY comparison as SunCon was only listed this year.

Deviation

• While 9M PBT was inline, making up 76% of our full year forecast, earnings was above expectations at 85% (consensus: 77%) due to lower than expected effective tax rate.

Dividends

• None. To be declared in 4Q.

Highlights

• Strong on job wins. SunCon’s YTD job wins currently stands at RM2.6bn, surpassing management’s target of RM2.5bn. Job wins this year are also the 2nd highest in the last 5 years (highest being in FY13 at RM3bn). Its orderbook stands at RM4.3bn, implying a healthy cover ratio of 2.3x on FY14 revenue.

• Ready for the influx of jobs. Given its strong track record amongst the various government related entities (e.g. Prasarana, MRT Corp, Putrajaya Holdings and KLCC Group), we reckon that SunCon is in a polar position to ride on the impending construction upcycle under the 11MP. Track record wise, SunCon is the only contractor that has experience with all 3 major public transport projects, namely the LRT, MRT and BRT.

Risks

• Orderbook replenishment coming below its burn rate.

Forecasts

• We raise FY15 earnings by 4% to account for the low effective tax rate and FY16-17 by 3-4% on back of slightly higher than expected job wins.

Rating

• Upgrade to BUY, TP: RM1.59
• SunCon is a well-managed company with commendable execution capability, putting it in a prime spot to ride on the robust contract flows under the 11MP. Its strong job wins YTD compels us to upgrade our rating from Hold to BUY.

Valuation

• Apart from our earnings upgrade, we also raise our P/E target from 14x to 16x on FY16 earnings. We reckon that this higher valuation multiple is justified given its net cash position and superior ROE. This multiple is also in line with the valuation for its closet peer by market capitalisation, WCT Holdings (HOLD, TP: RM1.41).

Source: Hong Leong Investment Bank Research - 25 Nov 2015