Sunway Construction (Suncon) reported 3Q18 result that was below market and our expectations. Core net profit grew 12% yoy to RM107m in 9M18, lagging our forecast. Hence, we cut our core EPS by 7-16% in FY18-20E. Suncon secured RM1.35bn new contracts YTD (target RM1.5bn in FY18) to replenish its order book to RM5.2bn, providing earnings visibility. Suncon remains our top sector mid-cap BUY with a reduced TP of RM1.80, based on 10% discount to RNAV.

Below Expectations

Suncon’s net profit of RM108m (+5% yoy) in 9M18 comprised only 67-69% of consensus full-year forecast of RM157m and our estimate of RM161m. We were surprised by its precast concrete business, which incurred a loss before tax of RM1.9m in 3Q18 and slow progress billings for its construction arm. The review of the Klang Valley LRT Line 3 (LRT3) project led to delays in progress billings. The stations are being re-designed by the main contractor MRCB-George Kent Joint Venture to reduce cost. The review of Suncon’s RM2.18bn LRT3 Package GS07-08 contract for potential cuts in scope of works and value is expected to complete in 4Q18.

Construction Remains Key Earnings Driver

Revenue jumped 23% yoy to RM1.63bn in 9M18, driven by construction (+26% yoy) division, partly offset by the 13% yoy decline in precast concrete revenue. PBT increased by a slower 7% yoy to RM136m as construction PBT rose 25% yoy, partly held back by the 82% yoy decline in precast concrete PBT. High production cost and stiff price competition in Singapore contributed to the lower precast concrete PBT of RM4m in 9M18.

Cut EPS Forecasts and TP

The slow progress billings for construction and weaker precast concrete earnings led us to cut our core EPS by 7-16% in FY18-20E. We maintain our RM1.5bn new contract assumption but cut our assumptions to RM1.5bn (-25%) in FY19E and RM2bn (-20%) in FY20E in view of the challenging construction sector prospects.

Lower RNAV/share But Still a BUY

We cut our RNAV/share estimate to RM2.22 from RM2.72 to reflect lower valuations for the construction and precast concrete divisions. Based on the same 10% discount to RNAV, we cut our TP to RM2.00 from RM2.45. Maintain BUY.

Source: Affin Hwang Research - 21 Nov 2018