SUNCON’s 9M16 CNP of RM94.0m came within our but broadly within streets’ expectations, accounting for 71% and 69% of full-year estimates, respectively. We are expecting a strong 4Q16 as billings pick up pace for its newly acquired projects. No dividend declared as expected. No changes in earnings estimate. Maintain OUTPERFORM with an unchanged SoP-driven Target Price of RM1.81.

Within expectations. SUNCON’s 9M16 CNP of RM94.0m was inline with our but broadly within streets’ expectation, making up 71% and 69% of full-year estimates, respectively. No dividend declared for the quarter as expected. We deem the 9M16 results to be broadly within streets’ estimates, as we expect a pick-up in profitability in 4Q16 as progressive billings from most of its on-going and newly acquired projects comes on stream.

Result highlights. 9M16 CNP slid by 6% despite an improvement in EBIT margins of 9% (+1ppt) mainly due to the sharp decline of 28% in pre-tax profits for its pre-cast division albeit a flattish revenue due to the decline in margins as a result of lower selling price from stiff pricing competition. That said, its effective tax rate was higher at 21% (+8ppt), which we believe was due to higher profit contribution from Malaysia. On a positive note, although its construction division registered a decline in revenue (-17%), it managed to register an impressive pre-tax profit growth of 38% driven by improved margins of 7% (+3ppt).

QoQ, SUNCON managed to maintain a flattish CNP of RM32.2m (+1%) for 3Q16 despite an 11% decline in revenue driven by its precast division, which registered a growth of 46% in pre-tax profits driven by the improvement in margins (+4ppt) and higher revenue (+14%).

Outlook. SUNCON’s outstanding order book stands at RM4.8b 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 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 - 23 Nov 2016