Sunway Construction’s (Suncon) 9M17 result was lagging market and our expectations. Core net profit increased 20% yoy to RM98m in 9M17 due to higher revenue and improved blended profit margin. But the weaker precast concrete earnings led us to cut EPS by 3-6% in FY17-18E but lift EPS by 1% in FY19E. We expect progress billings on its RM6.8bn order book to accelerate and drive EPS growth of 34% yoy in FY18E. Maintain HOLD with lifted 12M TP of 2.45.

Below Expectations

Net profit of RM106m (+16% yoy) in 9M17 was only 69-71% of consensus and our FY17 forecasts of RM149-153m. The delayed delivery of precast concrete components due to slow progress by some main contractors in Singapore led to the earnings lag. However, Suncon expects work progress to pick up and new contracts secured will lift precast concrete revenue in FY18E. But the higher new construction contracts secured of RM3.75bn (excluding the MRT Line 2 stations package of RM212m which was included in FY17 new contracts secured) was above our new contract assumption of RM3bn, partly offsetting the drag from the precast segment.

Construction Was Key Earnings Driver

Revenue grew 8% yoy to RM1.33bn in 9M17, which was mainly driven by its construction segment (17% yoy) while its precast concrete segment saw a contraction (-41% yoy). PBT increased 12% yoy to RM130m in 9M17 led by its construction segment (+40% yoy) while its precast concrete division fell (-40% yoy). Construction PBT margin improved to 8.7% in 9M17 compared with 7.3% in 9M16, while precast concrete PBT margin increased slightly to 20.7% in 9M17 from 20.4% in 9M16.

Good Prospects for New Contracts

Suncon is looking to bid for the RM2bn KL-Klang Bus Rapid Transit, upcoming RM40bn MRT Line 3 and building projects (including hospital projects for parent Sunway Bhd) in the Klang Valley. We assume new contracts of RM3.8bn in FY17E and RM2bn p.a. in FY18-19E.

Maintain HOLD

We upgrade our RNAV/share to RM2.72 from RM2.60 assuming higher sustainable earnings for construction segment of RM155m (RM145m previously), justified by the strong order book growth. Based on the same 10% discount to RNAV, we lift our TP to RM2.45 from RM2.34. We maintain our HOLD call due to limited upside potential.

Source: Affin Hwang Research - 21 Nov 2017