Results

• SunCon reported 3QFY16 results with revenue at RM381m (-15% YoY, -11% QoQ) and earnings of RM31.1m (+21% YoY, +0% QoQ).

• Cumulative 9M earnings of RM91.5m decreased -7% YoY.

Deviation

• 9M earnings were within expectations at 73% of our full year forecast but below consensus at 67%.

Dividends

• None declared for the quarter.

Highlights

• Lower topline but higher margins. Construction witnessed 9M revenue decline by -17% as a result of the timing gap between the completion of older jobs such as the LRT ext and MRT1 while the newer ones have yet to kick into full swing. Despite the lower topline, PBT margins for the division expanded YoY from 4.4% to 7.3%. Margins were suppressed last year due to losses booked for a particular project.

• Strong job wins. SunCon has managed to secure RM2.6bn worth of new jobs YTD (FY15: RM2.6bn), surpassing its earlier guidance of RM2.5bn. Its orderbook of RM4.8bn translates to a healthy cover of 2.5x on FY15 revenue. Looking ahead, SunCon is hopeful to secure another private sector job (RM200m) by year end. Management indicated that that apart from the LRT3, its tenders have now tilted towards private sector jobs as most of the major government related ones have already been awarded (e.g. MRT2, Pan Borneo, SUKE, DASH).

• Normalisation continues. 9M precast revenue was flat YoY despite higher volume as this was offset by lower selling price resulting from stiffer competition. PBT fell -28% YoY due to margin normalisation from 28.4% to 20.4%. To recap, precast margins were boosted last year due to certain account finalisations.

Risks

• Orderbook replenishment coming below its burn rate.

Forecasts

• As the results were inline we maintain our earnings forecast.

Rating

Maintain BUY, TP: RM1.93

• SunCon is a well-managed company with commendable execution capability, putting it in a prime spot as a pure construction play.

Valuation

• While there are no changes to our earnings forecast, we roll forward our valuation horizon from mid-CY17 to FY17 at an unchanged 18x P/E target. This raises our TP from RM1.84 to RM1.93.

• 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 RM331m (RM0.26/ share

Source: Hong Leong Investment Bank Research - 23 Nov 2016