Good Start

Sunway Construction’s (Suncon) 1Q17 result was below 1/4th of market and our expectations. Core net profit jumped 21% qoq and 51% yoy to RM34.2m in 1Q17 on better margins. We expect progress billings on its RM4.6bn order book to accelerate and lift earnings in subsequent quarters and hence maintain our EPS forecasts. We lift our target price to RM2.13 from RM2.00, based on 10% discount to upgraded RNAV. But the share price outperformance has narrowed potential upside to 3%, prompting us to downgrade our call to HOLD from Buy.

Highest Quarterly PBT

Net profit of RM34.2m in 1Q17 comprises 21-22% of full-year consensus and our forecasts of RM155.5-162.7m. Revenue declined 24% qoq and 1% yoy to RM419.5m, mainly due to lower construction revenue. Some building jobs were completed in 4Q16 while new projects saw slower progress due to design finalization. But PBT increased 17% qoq and 18% yoy to RM44.2m in 1Q17, the highest quarterly PBT since listing, on the back of better construction PBT margins (8.1% in 1Q17 vs 7.0% in 1Q17 and 4.4% in 4Q16). Net profit grew 8% qoq and 19% yoy in 1Q17.

Higher Construction Earnings

Construction profit earnings was lifted by one-off arbitration award of about RM3m, which relates to an Indian highway project completed in the past. Suncon secured RM0.9bn (includes RM212m contract for MRT Line 2 stations which forms part of MRT V201 package secured last year) new contracts to date, expanding its order book to RM4.6bn, equivalent to 2.6x FY16 revenue. Good prospects for new contracts as Suncon is bidding for the LRT Line 3 package that could be worth RM2bn.

Lower Precast Concrete Earnings

Precast concrete PBT increased 37% yoy in 1Q17 on higher revenue (+36% yoy). PBT fell 9% qoq, as revenue declined 21% qoq due to lower production volume as construction progress slowed.

Downgrade to HOLD

We upgrade our RNAV/share to RM2.37 from RM2.23 assuming higher PER of 16x compared to 14x previously to value its construction and precast concrete divisions as peer average PER has expanded. Based on the same 10% discount to RNAV, we lift our TP to RM2.13 from RM2.00. We downgrade our call to HOLD from Buy due to limited potential upside.

Source: Affin Hwang Research - 26 May 2017