Sunway Construction’s (Suncon) 1H17 result was below market and our expectations. Net profit increased 18% yoy to RM71.4m driven by higher construction earnings. However, precast concrete earnings was lower due to slow progress for the main contractor that Suncon supplies products. We cut our EPS by 6% in FY17E to reflect lower slower progress billings but lift our EPS by 2-10% in FY18-19E to reflect higher new contract assumptions. We reiterate our HOLD call with higher TP of RM2.34, based on 10% discount to RNAV.

Lower 1H17 Core Net Profit

Net profit of RM71.4m (+18% yoy) in 1H17 comprised 44-46% of full-year consensus and our previous forecasts of RM154.4-162.7m. Revenue declined 2% yoy to RM837m due to lower precast concrete revenue. The main contractor that Suncon supplies precast products saw slow progress. However, PBT increased 15% yoy to RM86.9m in 1H17, on the back of better construction PBT margins (8.8% in 1H17 vs 6.4% in 1H16) and exceptional gains of RM8.8m. However, core net profit fell 10% yoy to RM61.8m in 1H17 due to lower precast concrete earnings.

Higher Construction Earnings

Construction profit PBT jumped 37% yoy to RM64.8m (75% of group PBT) in 1H17 due to improved PBT margin and arbitration gain of RM6.1m, which relates to an Indian highway project completed in the past. Suncon secured RM0.99bn (includes RM212m contract for MRT Line 2 stations which forms part of MRT V201 package secured last year) new contracts to date, replenishing its order book to RM4.3bn, equivalent to 2.4x 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 declined 22% yoy to RM22.1m in 1H17 on lower revenue (-18% yoy) due to lower sales volume as construction progress for a main contractor slowed. PBT margin eased 1.2ppt yoy to 22.4% in 1H17.

Maintain HOLD

We upgrade our RNAV/share to RM2.60 from RM2.37 after lifting our construction segment valuation (higher sustainable earnings assumed) and rolling forward the valuation base year to FY18E. Based on the same 10% discount to RNAV, we lift our TP to RM2.34 from RM2.13. We reiterate our HOLD call supported by reasonable net yield of 3%.

Source: Affin Hwang Research - 25 Aug 2017