Suncon announced that it has entered into a novation agreement with MRCB GKent JV which reduces its LRT3 outstanding orderbook to RM706m. Current outstanding orderbook comes down to RM5.3bn implying a healthy 3.0x cover ratio. We expect stronger earnings in 2HFY20 as work progress normalises post-MCO. Cut FY20-22 earnings by 2-6% as we impute lower LRT3 contract value. Maintain BUY with lower TP of RM2.07 after earnings adjustment based on 15x ex-cash PE multiple.

NEWSBREAK

LRT3 novation. SunCon announced that it has entered into a novation agreement with MRCB-GKent JV which is the turnkey contractor for the LRT3. The novation came about due to appointment of MRCB-GKent JV as a turnkey contractor resulting from a change from project delivery partnership to a turnkey contract between Prasarana and MRCB-GKent JV. Under the agreement, Suncon’s total contract sum has been reviewed downwards from RM2.2bn to RM1.3bn. Based on the announcement, completion timeline is revised to 30 Nov-2023.

HLIB’s VIEW

Worse than expected. The scale of downsizing (-40%) of the original contract value (RM2.2bn to RM1.3bn) was larger than expected as we had earlier anticipated a 30% decline. Pursuant to the novated contract, Suncon’s unbilled LRT3 orderbook falls to RM706m from RM1.6bn. The latest revisions would bring Suncon’s outstanding orderbook to c.RM5.3bn implying a still healthy cover ratio of 3.0x on FY19 revenue. Note that Suncon has not included substructure works for the mixed development project (RM119m) as outstanding orderbook due to a pending LoA. Nonetheless, we understand that works for the project has started since mid-July.

Delayed but intact guidance. Active outstanding tenderbook stands at RM8.5bn, largely overseas focused. Despite a difficult year, Suncon has so far clinched c.RM1.4bn worth of jobs (pending RM119m substructure works), inching closer to its replenishment guidance of RM2bn. We believe this is achievable given its growing tenderbook (against RM7.3bn as at 1QFY20) inflated by new tenders in India and Philippines.

Forecast. Cut FY20/21/22 earnings by 1.7%/5.4%/4.8% after reducing our LRT3 contract value assumptions.

Maintain BUY, TP: RM2.07. Maintain BUY with lower TP of RM2.07 after earnings forecast adjustment. TP is derived by pegging FY21 EPS to 15x ex-cash P/E. We believe given its impressive execution track record, Suncon is well positioned to partake in pump priming initiatives. Its healthy balance sheet with net cash position of RM0.30/share and strong support from parent-co Sunway Bhd should provide some degree of resiliency during these trying times

Source: Hong Leong Investment Bank Research - 21 Aug 2020