SunCon reported 1QFY18 earnings of RM36m (+16% QoQ, +6% YoY) which were slightly below our expectations and consensus. While construction saw strong YoY PBT growth (+41%), precast fell 77%. Review of mega projects by the new administration post GE14 will negatively impact overall job flows but contracts from parent-co Sunway may help cushion this. Cut FY18-19 earnings by 8-13%. TP lowered from RM2.59 to RM2.37 (20x FY18 earnings).

Slightly below expectations. SunCon reported 1QFY18 results with revenue of RM529.2m (-29% QoQ, +26% YoY) and core earnings of RM35.9m (+16% QoQ, +6% YoY). The latter made up 21% of our full year forecast (consensus: 19%) which is slightly below expectations. No dividend was declared for the quarter.

Strong YoY growth for construction. The construction segment recorded a 40% and 41% YoY growth in revenue and PBT respectively. This was largely attributed to execution of its high orderbook following record job wins last year (RM3.7bn). Key projects that contributed during the quarter were Putrajaya Parcel F and International School of KL. SunCon’s construction orderbook (ex. precast) of RM5.9bn implies a healthy cover of 3.1x on FY17 construction revenue.

Contract outlook turns uncertain. Management guides for RM1.5-2bn in new job wins for FY18. With GE14 done and dusted, the new administration has stated that it will review the terms of mega contracts to ensure that they are fair. We reckon that this will ultimately lead to either project cancellation or delays (as they are reviewed). While this will impact job flows to SunCon, we take some comfort in knowing that this will be partially buffered by contracts from its parent-co. Thus far, the bulk of its RM722m YTD job wins have been from Sunway (BUY, TP: RM2.30)

Steep decline for precast. The precast segment saw a 46% YoY decline in revenue and a steeper 77% fall in PBT. This was due to a combination of (i) longer delivery duration for some of its precast contracts leading to slower revenue recognition and (ii) higher steel price (30% of cost) resulting to margin erosion (PBT margin contracted YoY from 23% to 9.6%).

Forecast. In view of the lower than expected results, we cut FY18-19 earnings by 8% and 13% respectively after (i) reducing construction new job wins from RM2bn to RM1.5bn for FY18 (FY19: RM2bn) and (ii) lowering precast margin.

Maintain BUY, TP: RM2.37. Following the earnings cut, our TP is lowered from RM2.59 to RM2.37 which is still tagged to 20x FY18 earnings (2 year mean: 19.4x). Despite the macro contract flow uncertainty, we continue to like SunCon as a well managed contractor with a healthy balance sheet (net cash: RM0.35/share).

Source: Hong Leong Investment Bank Research - 18 May 2018