Still lagging

Sunway Construction’s (Suncon) 9M16 results were below our and market expectations. We were surprised by the low revenue and high effective tax rate. Net profit fell 7% yoy to RM91.5m in 9M16, mainly due to lower revenue (-15% yoy) and higher tax expense (+74% yoy). We cut our earnings forecasts by 3-13% for FY16-18, assuming lower precast concrete earnings and a higher tax rate. We reduce our RNAV-based target price to RM2.00 from RM2.03. Maintain BUY.

Lower earnings

Suncon’s 9M16 net profit of RM91.5m was only 64-67% of the full-year consensus forecast of RM135.8m and our previous estimate of RM143m. The completion of several projects early this year and the slow ramp-up of new projects led to a 15% yoy decline in revenue to RM1.24bn. But PBT was up 4% yoy to RM116m in 9M16 due to a higher EBIT margin of 9.1% (compared to 7.9% in 9M15) and lower asset impairment. Net profit declined 7% yoy as the effective tax rate normalized to 21% in 9M16 vs 12.6% in 9M15. Core net profit fell 11% yoy to RM91.6m.

Higher construction profit margin

Construction revenue fell 17% yoy in 9M16 as several projects were completed early this year, while new projects such as the RM1.27bn MRT Line 2 V201 package have not started to contribute significantly. But construction PBT rose 38% yoy due to the absence of a provision for lossmaking projects, and the PBT margin improved to 7.3% in 9M16 vs 4.4% in 9M15.

Lower precast concrete earnings

Precast concrete revenue fell 22% yoy in 9M16 due to lower delivery volume but is expected to pick up in 4Q16. Precast concrete PBT fell 28% yoy on a lower PBT margin of 20.4% in 9M16 vs 28.4% in 9M15.

Top sector BUY

We believe Suncon’s current ex-cash FY17E PER of 10x is attractive, considering expected strong EPS growth of 32% yoy. Maintain BUY. We reduce our RNAV/share estimate to RM2.23 from RM2.26, reflecting lower valuation for its precast concrete business (lower sustainable earnings). Based on the same 10% discount to RNAV, we reduce our target price to RM2.00 from RM2.03. Suncon remains our top sector BUY. Key risks are public infrastructure project implementation delays and cost overruns

Source: Affin Hwang Research - 23 Nov 2016