SUNCON’s 1H16 CNP of RM61.8m was broadly in line, accounting for 46%/44% of our/street’s full-year estimates. NDPS of 2.5 sen declared, as expected. Outlook remains bright with a strong outstanding order book of RM4.9b with more potential wins. No changes to FY17-18E core earnings. Maintain OUTPERFORM with an unchanged Target Price of RM1.81.

Within expectations. SUNCON’s 1H16 CNP of RM61.8m was broadly in line, making up 46% and 44% of our and street’s full-year estimates. We are expecting a stronger 2H16 performance as the construction billings for its newly started projects pick up pace. A single-tier interim dividend of 2.5 sen was declared as expected.

Results highlight. 1H16 CNP saw a sharp decline by 19%, YoY due to lower revenue registered (-14%, YoY), dragged down by both of its division namely construction (-14%, YoY) and pre-cast (-16%, YoY). Construction division has yet to see meaningful contribution from MRT jobs as works only started in early July 2016. Furthermore, they had a project handover back in 1H15, i.e. BRT which explains the higher revenue back in 1H15. Its pre-cast division weaker revenue was a result of a softer average selling price due to low raw material prices. QoQ, 2Q16 CNP saw an improvement of 6% despite a marginal increase of 1.0% in revenue primarily driven by a lower effective tax rate of 18% vis-à-vis 23% in 1Q16 due to a higher earnings contribution from Singapore.

Outlook. 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 OUTPERFORM. We maintain our OUTPERFORM call on our Top Pick with an unchanged TP of RM1.81 based on SoP valuation. Considering SUNCON’s strong job flows, execution track record 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 - 26 Aug 2016