Yesterday, SUNCON announced that they have bagged a RM268m contract for the construction of the International School of Kuala Lumpur located at Ampang, KL from The Society of International School KL. We are NEUTRAL on this award as it is within our FY16E replenishment target of RM2.9b. Hence, we make no changes to our earnings estimates. Maintain OP with an unchanged TP of RM1.81.

New contract. Yesterday, SUNCON announced they have secured a RM268m contract from The Society of International School KL for the construction of the International School of Kuala Lumpur at Ampang, Kuala Lumpur. The scope of works includes construction of five teaching facilities and a main building comprising various facilities and fittings for 2,500 students. The project is targeted to complete in 22 months.

NEUTRAL on the award. We are neutral on the award as it is within our FY16E order book replenishment target of RM2.9b. Year-to-date, SUNCON has secured RM2.4b worth of contracts representing 83% of our target with a remainder of RM500m to be achieved. Assuming 8% PBT margin, this contract is expected to contribute c.RM8.8m to bottom line per annum.

Outlook. Post-award win, SUNCON’s outstanding order book stands at RM4.9b providing earnings visibility for the next 2-3 years. We believe our FY16E replenishment target of RM2.9b is highly achievable underpinned by anticipated project wins from LRT3, which is expected by year-end or beginning of 2017.

Earnings unchanged. We make no changes to our FY16-17E earnings forecasts as the award is within our FY16E replenishment target.

Maintain OUPERFORM. We maintain our OUTPERFORM call on our Top Pick with an unchanged TP of RM1.81 based on SoP valuations. Considering SUNCON’s strong job flows and light balance sheet against other big cap peers, we feel our valuation is fair as our SoP derived TP of RM1.81 implies FY17E PER of 15.7x which is slightly below our big caps’ targeted PER range of 16-18x.

Risks to our call include: (i) lower-than-expected margins/order book replenishment, (ii) delay in construction works, and (iii) cut or delay in government spending on infrastructure and affordable housing projects.

Source: Kenanga Research - 23 Aug 2016