SunCon has yet to receive any notification from MRT Corp regarding details of any reduction in work scope and works have been ongoing as usual. We understand that reduction of the project is mainly on scaling down of station works and thus the impact of downsizing of the project is expected to be minimal to SunCon. We expect the precast segment PBT margin to normalize back to 10-15% starting from 2H19 due to recovery of product pricing. Management has reiterated its FY18 orderbook replenishment target of RM1.5bn in which RM854m has been achieved YTD. Maintain forecast and BUY with lower TP of RM1.86 (from RM2.25) as we opine that upcycle PE of 20x is no longer justifiable during the current industry downturn. As such, our new TP is pegged to 16.5x FY19 earnings which is -1SD below 2 years historical average.

We met up with the management of SunCon recently with the following key takeaways:

MRT2. Recent announcement of scaling down of above-ground portion of MRT2 and retender of underground portion had dealt a blow to construction sector. However, SunCon has yet to receive any notification from MRT Corp regarding details of any reduction in work scope and works have been ongoing as usual. We understand that reduction of the project is mainly on scaling down of station works. Since the contract value of 3 stations works in SunCon’s work package is just RM212m out of total work package value of RM1.2bn, the impact of downsizing of the project is expected to be minimal. Overall progress of the contract is at 63% as at end of September 2018.

Precast. Precast segment PBT margin dropped significantly as the precast projects in Singapore were secured at a time when the industry was very competitive. Competitive pressure has come down and the product pricing has recovered but we only expect the segment PBT margin to normalize back to 10-15% starting from 2H19 as contribution from newly secured projects takes time to kick in.

Exploring foreign ground. Given the slowdown of domestic construction industry, SunCon is actively exploring for regional opportunities particularly in India and ASEAN region. The company will collaborate with foreign partners in contracts bidding to take advantage of local expertise.

Orderbook. Management has reiterated its FY18 orderbook replenishment target of RM1.5bn of which RM854m has been achieved YTD. It has tendered for (i) TNB campus building contract (RM700-800m) which currently, they are working on the piling works and (ii) Dayabumi redevelopment project (RM700-800m) which may be awarded in phases. They are also tendering for contracts worth RM400-500m from its parent-co. Outstanding orderbook as at end of 2Q18 stands at RM5.8bn, translating into healthy level of 3x cover of FY17 construction revenue.

Forecast. Maintained as the meeting yielded no major surprises.

Maintain BUY, TP: RM1.86. Maintain BUY with lower TP of RM1.86 (from RM2.25) as we opine that upcycle PE of 20x no longer justifiable during current industry downturn. As such, our new TP is pegged to 16.5x FY19 earnings which is -1SD below its 2 year historical average. Although the new PE target may still seem too high relative to its peers (10-12x for large cap players and 7-9x for small-mid cap players), the valuation is much reasonable if we take into account its net cash of RM0.35/share which implies an ex-cash PE target of 13.5x. We opine that SunCon deserves a premium valuation due to (i) healthy balance sheet; (ii) pure construction play and (iii) strong support from parent co which enable it to ride through current down cycle.

Source: Hong Leong Investment Bank Research - 18 Oct 2018