Sunway Construction’s (Suncon) 1H18 result was below market and our expectations. 1H18 core net profit grew by 14% yoy to RM69m driven by higher construction earnings, partially offset by weaker precast earnings. We cut our FY18E earnings by 6%, imputing lower precast earnings due to the weak 1H18 results and slower-thanexpected pickup in business activities. Overall, Suncon’s earnings visibility remains good - its order book of RM5.8bn is equivalent to 2.7x FY17 revenue. Maintain BUY with an unchanged TP of RM2.45 based on a 10% discount to RNAV.

1H18 Core Net Profit Grew by 14%, a Tad Below Expectations

Suncon’s 1H18 revenue jumped by 28% yoy to RM1.1bn, driven by higher construction segment revenue (+36% yoy) due to higher work progress at key projects sites. However, 1H18 precast revenue fell by -29% yoy following the completion of several projects in the prior quarters. Suncon’s 1H18 core net profit of RM69m (+14% yoy) accounted for 40%-41% of street and our full year earnings estimates, which was below expectations. The earnings miss was mainly due to weaker than expected precast concrete earnings. Suncon declared a 3.5 sen DPS in 1H18 (1H17: 3 sen).

Core Net Profit Up by 5% Qoq

Sequentially, 2Q18 revenue was up 3% qoq to RM544m on the back of higher revenue from construction segment (+4% qoq) which more than offset weaker precast revenue (-12% qoq). The higher 2Q18 revenue translated to a higher EBITDA of RM52m (+3% qoq) and higher core net profit of RM35m (+5% qoq).

Large Orderbook Provide Good Earnings Visibility

Suncon has won RM312m worth of new contracts in 2Q18 / RM854m in 1H18. Its outstanding order book of RM5.8bn is equivalent to 2.7x FY17 revenue, providing good earnings visibility. We maintain our new order book target of RM1.5bn in FY18.

Cutting FY18E Earnings, Maintain BUY

We cut our FY18E earnings by 6% to reflect the weak 1H18 precast concrete earnings and soft immediate market outlook. Nonetheless, we maintain our BUY call with an unchanged TP of RM2.45, based on a 10% discount to RNAV. We believe that Suncon is in a good position to weather the expected slowdown in the construction sector given its large orderbook and high net cash of RM457m or RM0.35/share.

Source: Affin Hwang Research - 17 Aug 2018