Results

• SunCon reported 4QFY16 results with revenue at RM553.1m (+45% QoQ, +18% YoY) and core earnings of RM32.1m (+3% QoQ, +88% YoY).
• Full year FY16 core earnings amounted to RM123.5m, increasing +8% YoY (note that we have adjusted last year’s core earnings for reversal of a lumpy impairment).

Deviation

• FY16 earnings made up 98% of our full year forecast (97% of consensus) which is within expectations.

Dividends

• Dividend of 2.5 sen has been proposed. This brings full year dividends to 5 sen, higher than the 4.4 sen we projected.

Highlights

• Construction margin expansion. Despite a -10% decline in FY16 construction revenue, this was more than offset by the division’s margin expansion from 3.8% to 6.4%, boosting PBT by +50% YoY. The revenue decline was due to timing gap between completed jobs and the commencement of newly secured ones. On margins, the YoY expansion was a result of (i) lower base in FY15 due to accelerated cost and (ii) better than anticipated margins in FY16 on certain jobs towards their tail end.
• Beating its target. SunCon managed to secure RM2.7bn in new job wins for FY16 (FY15: RM2.6bn), surpassing its initial target of RM2.5bn. Its orderbook now stands at high of RM4.8bn, implying a healthy cover ratio of 2.7x on FY16 construction revenue. Looking ahead, management aims to replenish its orderbook by RM2bn in FY17.
• Normalisation for precast. For the precast division, FY16 revenue grew +13% YoY but PBT fell -24%. This was due to downward margin normalisation from a high base in FY15 given the finalisation of certain accounts.

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. While upside may have narrowed following its 7.1% share price run up since mid-Jan, total potential returns (including dividends) of 10% justifies our unchanged BUY rating.

Valuation

• Our unchanged TP of RM1.93 is based on an 18x P/E tagged to FY18 earnings.
• We reckon that our premium valuation yardstick for SunCon is justified given (i) its superior ROE of >20% which is double that of its peers average and (ii) healthy balance with net cash position of RM329m (RM0.25/ share).

Source: Hong Leong Investment Bank Research - 24 Feb 2017