SunCon’s FY18 earnings of RM145m (+6% YoY) were within both ours and consensus expectations. 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 RM6.0bn translates into 2.7x cover ratio and going forward we expect more jobs from parent-co Sunway. Maintain forecast but downgrade rating from Buy to HOLD given limited share price upside which has appreciated 31% YTD.

Within expectations. SunCon reported 4QFY18 results with revenue of RM626.0m (+12% QoQ, -16% YoY) and core earnings of RM36.6m (+0.4% QoQ, +18% YoY). This brings FY18 core earnings to RM144.7m, increasing by 6% YoY. The core earnings accounted for 99% of our full year forecast (consensus: 99%), within expectations. Declared 2nd interim dividend of 3.5 cents (FY18: 7.0 cents).

QoQ. Core PATAMI remained flattish as higher revenue from construction segment was offset by lower margin in precast segment.

YoY. Core PATAMI increased by 7% as higher contribution from construction segment was partially offset by lower contribution from precast segment

YTD. Core PATAMI increased by 6% 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.

MRT2. MRT2 contract package (RM1.2bn) for Suncon will progress as planned with some reduction to stations 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.

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.

Orderbook. SunCon’s latest outstanding orderbook stands at c.RM6.0bn, translating into healthy level of 2.7x cover of FY18 revenue. Management maintains its orderbook target of RM1.5bn for FY19, of which RM781m has been achieved YTD. Going forward, we expect more jobs to come from its parent co Sunway (BUY, TP: RM2.18) due to reduction in government spending on public infrastructure projects and continue slowdown of property market which results in less building jobs.

Forecast. Maintained.

Downgrade to HOLD, TP: RM1.81. Share price of SunCon has performed relatively well, increasing by 31% YTD, validating it as our top pick. While we like SunCon as a well managed contractor, the narrowed upside at current share price prompts us to downgrade our rating from Buy to HOLD at an unchanged TP of RM1.81 (16.5x PE on FY19 earnings).

Source: Hong Leong Investment Bank Research - 26 Feb 2019