SunCon reported 1QFY19 earnings of RM29m (-21% QoQ, -19% YoY) which were below our expectations and consensus. This was mainly due to delay in both LRT3 and MRT2 work packages. We understand that review for Suncon’s MRT2 packages has been completed and magnitude of reduction of works is estimated to be RM60m which has been reflected in the outstanding orderbook. SunCon’s construction orderbook (ex. precast) of RM5.4bn implies a healthy cover of 2.6x on FY18 construction revenue. Cut FY19-20 earnings by 1-3%. TP lowered from RM1.81 to RM1.76 (16.5x FY19 earnings).

Below expectations. SunCon reported 1QFY19 results with revenue of RM440.0m (- 30% QoQ, -17% YoY) and core earnings of RM29.1m (-21% QoQ, -19% YoY). The latter made up 20% of our full year forecast (consensus: 19%) which is below expectations. No dividend was declared for the quarter.

Decline for construction. The construction segment recorded a -17% and -5% YoY decline in revenue and PBT respectively. This was because of substantial completion of project Parcel F, Putrajaya and delay in both LRT3 and MRT2 work packages due to review of station works. We understand that the review for Suncon’s MRT2 packages has been completed and magnitude of reduction of works is estimated to be at RM60m which has been reflected in the outstanding orderbook. SunCon’s construction orderbook (ex. precast) of RM5.4bn implies a healthy cover of 2.6x on FY18 construction revenue.

Exploring foreign ground. Given the slowdown in the domestic construction industry, SunCon is actively exploring for regional opportunities particularly in India and ASEAN. We understand the company is currently bidding for a highway construction contract in India worth RM900m. Separately, Suncon has entered into a MoU with Myanmar conglomerate CDSG. It is evaluating internal projects undertaken by CDSG and its member companies in which, the CDSG-Suncon JV will be on a 65:35 basis. Suncon is also actively looking for piling jobs in Singapore and we understand that there is under-supply for piling capacity in the country at the moment.

Recovery signs for precast. The precast segment saw a -11% YoY decline in revenue and a steeper -97% fall in PBT. This was because the precast projects in Singapore were secured at a time when the industry was very competitive. Nonetheless there are recovery signs as the precast segment turned profitable this quarter after 2 consecutive previous quarters of losses. We expect performance of this segment to normalize starting from 2H19 as contribution from newly secured projects takes time to kick in.

Forecast. In view of the lower than expected results, we cut FY19-20 earnings by 3% and 1% respectively after factoring in adjustment of progress billings and reduction of MRT2 packages value.

Maintain HOLD, TP: RM1.76. Following the earnings cut, our TP is lowered from RM1.81 to RM1.76 which is still tagged to 16.5x FY19 earnings. While we like SunCon as a well-managed contractor, we reckon that valuations are fair at current levels.

Source: Hong Leong Investment Bank Research - 17 May 2019