SunCon’s 9MFY18 earnings of RM108m (+3% YoY) were above 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 due to low margin jobs secured earlier from stiff competition. Competitive pressure in Singapore precast industry 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. Outstanding order book of RM5.6bn translates into 3x cover ratio and going forward we expect more jobs from parent-co Sunway. Raise FY18 earnings by 6% after taking into account higher construction margin. Maintain BUY with unchanged TP of RM1.86 based on 16.5x FY19 earnings.

Above HLIB but below consensus estimates. SunCon reported 3QFY18 results with revenue of RM557.3m (+2% QoQ, +13% YoY) and core earnings of RM36.4m (+2% QoQ, +5% YoY). This brings 9MFY18 core earnings to RM108.1m, increasing by 3% YoY. The core earnings accounted for 80% of our full year forecast (consensus: 69%), above our expectations but below consensus estimates. This is mainly due to higher than expected construction margin. No dividend was declared.

QoQ. Core PATAMI increased by 2% mainly due to higher revenue from both construction and precast segments, partially offset by lower margin in precast segment.

YoY. Core PATAMI increased by 5% as higher contribution from construction segment is offset by lower contribution from precast segment

YTD. Core PATAMI increased by 3% due to higher progress of work in construction segment, partially offset by lower contribution from precast segment due to low margin jobs secured earlier from stiff competition.

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.

Parent-co comes to rescue. SunCon’s latest outstanding orderbook stands at c.RM5.6bn, translating into healthy level of 3x cover of FY17 construction revenue. Management maintains its orderbook target of RM1.5bn for FY18, of which RM1.35bn has been achieved YTD. Going forward, we expect more jobs to come from its parent co Sunway (BUY, TP: RM2.15) due to reduction in government spending on public infrastructure projects and continue slowdown of property market which results in less building jobs.

Forecast. Raise FY18 earnings forecast by 6% after impute higher construction margin. We maintain our forward earnings forecast as we prefer to remain conservative at this juncture due to slowdown of domestic construction industry.

Maintain BUY, TP: RM1.86. Maintain BUY rating with unchanged TP of RM1.86. TP is pegged to 16.5x P/E multiple to FY19 earnings. SunCon remains as our top pick among local construction peers 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 - 21 Nov 2018