SunCon’s 1HFY19 earnings of RM62m (-13% YoY) were below both ours and consensus expectations mainly due to continued delay in LRT3 package. YTD core PATAMI decreased due to lower contribution from both construction and precast segment. Outstanding order book of RM5.8bn translates into 2.6x cover ratio and going forward we expect more jobs would be from regional opportunities. Cut FY19-21 earnings forecast by 1-7%. Maintain BUY with lower TP of RM2.16 (from RM2.24) after earnings forecast adjustment, based on 20x PE multiple pegged to mid-FY19 earnings.

Below expectations. SunCon reported 2QFY19 results with revenue of RM440.2m (flat QoQ, -19% YoY) and core earnings of RM33.2m (+14% QoQ, -7% YoY). This brings 1HFY19 core earnings to RM62.2m, decreasing by 13% YoY. The core earnings accounted for 45% of our full year forecast (consensus: 43%) which is below expectations. Declared 1st interim dividend of 3.5 sen (1HFY18: 3.5 sen).

Deviations. The lower than expected performance was mainly due to continued delay in LRT3 package due to ongoing cost optimisation. LRT3 project will only resume in 4QFY19 (as opposed to previous expectations of mid-2019) and back to full swing in FY20.

QoQ. Core PATAMI increased by 14% attributable to higher margin in construction segment due to recognition of final account.

YoY. Core PATAMI decreased by 7% due to lower contribution from precast segment as current projects are yielding lower margin.

YTD. Core PATAMI decreased by 13% due to lower contribution from both construction and precast segment.

Precast. Precast segment performance remains flattish QoQ. Nonetheless this is better than losses recorded in 2H18 and we expect performance of this segment to normalize starting from 2H19 as contribution from newly secured projects takes time to kick in.

Orderbook. SunCon’s latest outstanding orderbook stands at c.RM5.8bn, translating into healthy level of 2.6x cover of FY18 revenue. SunCon is actively exploring for regional opportunities particularly in India and ASEAN in order to diversify the sources of job opportunities. 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.

Forecast. Cut FY19-21 earnings by 6.5%, 1.5% and 1.0% respectively after adjusting LRT3 package progress assumptions due to longer than expected delay.

Maintain BUY, TP: RM2.16. Maintain BUY with lower TP of RM2.16 (from RM2.24) after earnings forecast adjustment, based on 20x PE multiple pegged to mid-FY19 earnings. We like Suncon for its (i) good execution track record; (ii) strong support from parent-co Sunway Berhad (BUY, TP: RM2.18) and (iii) strong balance sheet with net cash position.

Source: Hong Leong Investment Bank Research - 20 Aug 2019