Sunway Construction (Suncon) reported net profit of RM36m (+3% yoy) in 1Q18. This result was below expectations mainly due to the weak precast concrete segment’s performance. We cut our EPS forecasts by 5-8% to reflect slower order book replenishment and weaker precast concrete earnings. However, earnings visibility is good with RM542m of new contracts secured YTD to replenish its order book of RM6.1bn, equivalent to 3x FY17 revenue. Suncon remains our top mid-cap construction BUY with a target price of RM2.45, based on a 10% discount to RNAV.

Below Expectations

Suncon’s 1Q18 net profit of RM36m comprises 20% of consensus and our full-year net profit forecasts of RM182-186m. Revenue jumped 26% yoy to RM529m, driven by its construction segment (+40% yoy) while the precast concrete segment (-46% yoy) remains a drag. Core net profit declined 2% yoy to RM33.5m, but a one-off arbitration gain of RM1.8m for its past completed project in Trinidad & Tobago lifted its net profit in 1Q18.

Construction Was Key Earnings Driver

Construction PBT jumped 103% yoy to RM40m in 1Q18 as progress billings accelerated on its large order book while the PBT margin was sustained at 8.2%. Precast concrete PBT contracted 85% yoy to RM3.6m in 1Q18 due to longer delivery periods on its existing order book. The PBT margin for the segment was also squeezed by higher steel bar prices (steel content comprises 30% of total cost) to 9.6% in 1Q18 compared to 23.0% in 1Q17. There was a qoq pick-up in precast concrete revenue (+41% qoq) and PBT (+38% qoq), and this should accelerate in 2H18.

Good Order Book Replenishment

Suncon secured 2 building projects from parent Sunway and some precast contracts to bring new contracts clinched YTD to RM542m. It plans to bid for the 5 planned Sunway hospital projects and LRT Penang. We reduce our new contract assumption to RM1.5bn in FY18 from RM2bn previously in anticipation of delays in government infrastructure project roll-outs.

Top Mid-cap Sector BUY

We reiterate our BUY call with an unchanged TP of RM2.45, based on a 10% discount to RNAV. High net cash of RM457m or RM0.35/share should allow Suncon to weather the expected slowdown in the construction sector.

Source: Affin Hwang Research - 18 May 2018