SunCon’s 9MFY19 earnings of RM98m (-10% YoY) were within ours but below consensus expectations. YTD core PATAMI decreased due to lower contribution from construction segment as majority of current projects are at its initial stages. Precast segment showed signs of recovery as old lower margin projects approach completion. Outstanding order book of RM5.6bn translates into 2.5x cover ratio and going forward, we expect regional jobs wins to come in. Maintain earnings forecast as results were in-line with expectations. Maintain BUY with higher TP of RM2.30 (from RM2.16 previously), based on 20x PE multiple pegged to FY20 earnings (rolled forward from mid-FY20).

Within expectations. SunCon reported 3QFY19 results with revenue of RM402.6m (- 9% QoQ, -28% YoY) and core earnings of RM35.5m (+7% QoQ, -2% YoY). This brings 9MFY19 core earnings to RM97.8m, decreasing by 10% YoY. The core earnings accounted for 75% of our full year forecast (consensus: 70%) which is within ours but below consensus expectations. No dividends were declared for the quarter.

QoQ. Core PATAMI increased by 7% mainly due to lower taxes for the quarter.

YoY/ YTD. YoY and YTD core PATAMI decreased by 2% and 10% respectively mainly due to lower contribution from construction segment as majority of current projects are at its initial stages, exacerbated by slow progress for LRT3.

Precast. Precast segment returned to marginal profit (3QFY19 PBT: RM0.2m) from breakeven position in 2QFY19. Margins improved QoQ by 0.5ppts as lower margin projects secured earlier approaches completion. We expect performance of this segment to normalize starting from 4QFY19 as contribution from newly secured higher margin projects kicks in.

Replenishment prospects. SunCon’s latest outstanding orderbook stands at c.RM5.6bn, translating into healthy level of 2.5x cover of FY18 revenue. Active outstanding tenderbook stands at an impressive RM7.4bn (FY18: RM6.0bn). On the domestic front, ECRL Package B will call for tenders starting 4Q19 generating an estimated RM3.5bn worth of civil works for local contractors. Additionally, we reckon the company may secure a slice of the Bayan Lepas LRT (RM8.5bn) when tenders are called in 2H20. Regionally, management guided that delays by project owners may result in foreign job wins flowing in by 1H20 (as opposed to this year as previously guided). SunCon is actively exploring opportunities particularly in India and ASEAN in order to diversify the sources of job opportunities. We understand its outstanding tenderbook includes a highway construction contract in India worth RM900m. Separately in Myanmar, the company is evaluating internal projects undertaken by its JV partner, CDSG. Across the causeway, Suncon is actively looking for piling jobs due to under-supply for piling capacity in Singapore at the moment. Sustained spending on HDB housing (15-18k units p.a.) should also bode well for its precast segment.

Forecast. Maintained as results were within our expectations.

Maintain BUY, TP: RM2.30. Maintain BUY with higher TP of RM2.30 (from RM2.16 previously), based on 20x PE multiple pegged to FY20 earnings (rolled forward from mid-FY20). We like Suncon for its i) good execution track record; ii) strong support from parent-co Sunway Berhad (BUY, TP: RM2.15) and iii) strong balance sheet with net cash position.

Source: Hong Leong Investment Bank Research - 20 Nov 2019