SunCon’s 1HFY18 earnings of RM72m (+2% YoY) were within our expectations but below consensus. YTD core PATAMI increased due to higher progress of work in construction segment, partially offset by lower contribution from precast segment that affected by higher steel prices. SunCon is negatively affected by scaling down of LRT3 as the 6 stations design and size for their LRT3 package (RM2.1bn) are under review and the work will not proceed as anticipated until the designs are confirmed. Outstanding order book of RM5.8bn translates into 3x cover ratio and going forward we expect more jobs from parent-co Sunway. Cut FY18-20 earnings by 12-13% after taking into account slow revenue recognition for LRT3. Maintain BUY with lower TP of RM2.25 based on 20x FY19 earnings.

Within expectations. SunCon reported 2QFY18 results with revenue of RM544.3m (+3% QoQ, +30% YoY) and core earnings of RM35.9m (flat QoQ, -3% YoY). This brings 1HFY18 core earnings to RM71.7m, increasing by 2% YoY. The core earnings accounted for 47% of our full year forecast (consensus: 43%), inline with HLIB but below consensus estimates. 3.5 cents interim dividend was declared.

YoY. Core PATAMI decreased by 3% mainly due to lower margin in precast segment caused by higher steel prices and higher tax rates, partially offset by higher progress of work in construction segment.

QoQ. Core PATAMI remain flat as higher contribution from construction segment is offset by lower contribution from precast segment

YTD. Core PATAMI increased by 2% due to higher progress of work in construction segment, partially offset by lower contribution from precast segment that affected by higher steel prices.

LRT3. LRT3 project size has been scaled down and the timeline to complete has been extended from 2020 to 2024. SunCon is negatively affected as the 6 stations design and size for their LRT3 package (RM2.1bn) are under review and the work will not proceed as anticipated until the designs are confirmed. Moreover, the extension of completion timeline further delays the revenue recognition into later periods.

Parent-co comes to rescue. SunCon’s outstanding order book stands at RM5.8bn, translating into healthy level of 3x cover of FY17 construction revenue. Management maintains its order book target of RM1.5bn for FY18, of which RM854m has been achieved YTD. Going forward, we expect more jobs to come from its parent co Sunway (BUY, TP: RM2.30) due to reduction in government spending on public infrastructure projects and continue slowdown of property market which results in less building jobs.

Forecast. Although the results were inline, we cut FY18-20 earnings by 12.0%, 13.3% and 12.7% respectively after taking into account slower revenue recognition for LRT3 due to ongoing project review and longer completion timeline.

Maintain BUY, TP: RM2.25. Maintain BUY rating with lower TP of RM2.25 (from RM2.37) following earnings cut and roll forward of valuation horizon from FY18 to FY19. Our TP is based on 20x FY19 earnings. 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 - 17 Aug 2018