Results

• SunCon reported 1QFY16 results with revenue of RM424m (-14% YoY, -10% QoQ) and earnings of RM29m (-15% YoY, -1% QoQ).

Deviation

• 1Q earnings made up 22% of our full year forecast and 21% of consensus which we deem to be slightly below expectations.

• The deviations largely stemmed from a normalisation of 2 key variables: (i) higher effective tax rate and (ii) lower precast margins vis-à-vis our assumptions.

Dividends

• None declared.

Highlights

• Normalisation of variables. SunCon’s effective tax rate increased (or rather, normalised) YoY from 13.2% to 22.6%. The low effective tax rate last year was due to the recognition of certain deferred tax assets. On the other hand, precast PBT margins contracted to 22.8% compared to 29.4% in 1QFY16 and 38.1% in 4QFY15. We treat this as a normalisation as precast margins were unusually high last year due to the account finalisation of certain completed projects.

• Orderbook at its high. SunCon’s orderbook stands at a record high of RM5bn, translating to a healthy cover ratio of 2.6x on FY15 revenue. YTD job wins have been robust at RM2bn (FY15: RM2.6bn). Management is gunning for several large scale jobs such as the Pan Borneo Sarawak (RM1.5bn with 30% stake), SUKE (RM1bn), DASH (RM1bn) and LRT3. There are also several private sector jobs on the cards such as (i) Ikea Mall in Tebrau (RM300m) where SunCon is one of the three prequalified names and (ii) an aero maintenance facility (>RM100m) near Subang Airport.

Risks

• Orderbook replenishment coming below its burn rate.

Forecasts

• We cut FY16-17 earnings by 4-5% respectively to reflect the faster than expected normalisation of its effective tax rate and precast margins.

Rating

• Maintain BUY, TP: RM1.84
• SunCon is a well-managed company with commendable execution capability, putting it in a prime spot to ride on the robust flow of mega contracts expected this year.

Valuation

• Following our earnings cut, our TP is lowered from RM1.94 to RM1.84, which is still based on an 18x P/E multiple applied to mid-CY17 earnings.
• We reckon that our premium valuation yardstick for SunCon is justified given (i) its superior ROE of 23% which is double that of its peers average and (ii) healthy balance with net cash position of RM298m (RM0.23/ share).

Source: Hong Leong Investment Bank Research - 27 May 2016