Results

• SunCon reported 2QFY17 results with revenue of RM417m (-1% QoQ, -3% YoY) and earnings of RM37m (+6% QoQ, +18% YoY). This brings cumulative 1H revenue to RM837m (-2% YoY) and earnings at RM71m (+18% YoY).

Deviation

• 1H earnings were within expectations at 51% of our full year forecast but slightly below consensus at 46%.

Dividends

• Interim dividend of 3 sen was declared vs 2.5 sen last year.

Highlights

• Higher construction margin. Although 1H construction revenue was flat YoY, PBT rose by 37% given margin expansion from 6.4% to 8.8%. This was attributed to (i) better margins recorded for its newer jobs and (ii) an arbitration gain from India.
• Contract flows remain healthy. SunCon’s YTD job wins stands at RM991m (including RM212m stations job which is part of its main MRT2 viaduct package). Management is gunning for RM2bn in job wins for FY17 (FY16: RM2.7bn) which could potentially see some sizable job flows for the remainder of the year. We gather that SunCon is one of the top contenders to secure a package of the soon to be awarded LRT3 (RM9bn) given its track record on jobs such as the LRT ext, MRT1 and BRT.
• Lower for precast. Both 1H revenue and PBT for the precast division fell 18% and 22% YoY. This was due to slow construction progress by the main contractor (i.e. SunCon’s client). PBT margin nonetheless remained relatively stable at 22.4% in 1H vs 23.6% last year.

Risks

• Orderbook replenishment coming below its burn rate.

Forecasts

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

Rating

Downgrade to HOLD, TP: RM2.33

• We acknowledge that SunCon is a well-managed contractor with commendable execution capability, putting it in a prime spot as a pure construction play. However, given its strong YTD share price performance of 36%, we feel that the stock is now priced to perfection and hence, we downgrade our rating from Buy to HOLD. It currently trades at FY17-18 P/E of 21.3x and 19.9x respectively. We advocate its parent-co Sunway (BUY, TP: RM5.14), which trades at FY17-18 P/E of 15.2x and 14.1x, as a cheaper exposure to SunCon.

Valuation

• While our earnings forecast are unchanged, we roll over our valuation horizon from mid-FY18 to end-FY18, raising our TP from RM2.25 to RM2.33 at an unchanged 20x P/E target.
• We reckon that our premium valuation yardstick for SunCon is justified given (i) its superior ROE of 27% which is more than double of its peer’s average and (ii) healthy balance with net cash position of RM364m (RM0.28/ share).

Source: Hong Leong Investment Bank Research - 25 Aug 2017