Yesterday, SUNCON announced that they have bagged three new contracts cumulatively worth RM209m from: (i) MMC-Gamuda for advanced MRT2 works and (ii) SUNWAY for construction works in Medini Iskandar Johor Bahru. We are NEUTRAL as these contracts are 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.

Three new contracts. Yesterday, SUNCON announced three new contracts cumulatively worth RM209m from MMC Gamuda and SUNWAY. The MMC Gamuda job entails MRT2 advance works in package V201 worth RM52.5m slated for completion in September 2017 while the SUNWAY contracts at Medini Iskandar includes: (i) precast construction of 88 units of shoplots, 1 block of office and mosque, 1 block of garbage storage and two TNB substations worth RM56.5m slated for completion in April 2018, and (ii) earthworks and main building works for a commercial development worth RM100m slated for completion in Oct 2017.

NEUTRAL on the awards. We are neutral on the awards which are within our FY16E order book replenishment target of RM2.9b. Year-to-date, SUNCON has secured RM2.6b worth of contracts representing 90% of our target with a remainder of c.RM300m to be achieved. Assuming 6% PBT margin, these contracts are expected to contribute c.RM6.6m to bottom line per annum.

Outlook. Post-award win, SUNCON’s outstanding order book stands at RM5.0b 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 these awards are within our FY16E replenishment target.

Maintain OUTPERFORM. We maintain our OUTPERFORM call on SUNCON with an unchanged TP of RM1.81 based on SoP valuation. 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 - 27 Sep 2016