FY16 CNP of RM117.6m was below expectation, accounting for 88%/92% of our and streets? full-year estimates. No dividend declared, but we are expecting a final dividend to be declared at a later date. Trim FY17E CNP by 2.5% and introduce FY18E CNP of RM146.9m. Downgrade to MARKET PERFORM from OUTPERFORM with a lower SoP-driven Target Price of RM1.77 (previously, RM1.81).

Below expectations. FY16 CNP of RM117.6m was below expectations, accounting for only 88%/92% of our/streets? full-year estimates. The shortfall in earnings was mainly due to the progress billings mismatch, as our progressive billings for its on-going jobs are much more aggressive as compared to actual performance. No dividends were declared in 4Q16, but we are expecting a final interim dividend to be declared on a later date.

Results highlight. FY16 CNP saw a decline of 9%, in line with the decrease in revenue (-7%), where the main drag in revenue was due to its construction division as some of its on-going projects have been handed over and they are currently on transition to MRT2 project, which has yet reached advance construction stage and hence meaningful contribution. On a positive note, its construction division saw improvements in pre-tax margins by 2ppt to 6% as SUNCON had previously recognised the costs for acceleration works for certain projects back in FY15. QoQ-wise, its revenue shot up 45% as the construction works for some of its on-going projects have picked up pace. However, its CNP came off by 27%, mainly bogged down by margin compression of 4ppt to 7%.

Outlook. For FY16, SUNCON managed to bag RM2.7b worth of jobs surpassing our replenishment target of RM2.5b. That said, they also started FY17 with a RM449.0m contract for construction of an apartment in Kelana Jaya by Sunway Bhd. Current outstanding order book stands at RM4.8b providing earnings visibility for the next 2-3 years. Going forward, management targets a lower replenishment of RM2.0b for FY17, while we also revised down our forecast to management?s target from RM2.5b previously. We believe a lower order-book replenishment target for FY17E is achievable should they secure a package from LRT3.

Revision in earnings. Following the downward revision in our FY17E order-book replenishments, we trimmed our FY17E CNP by 2.5%, and introduce our FY18E CNP of RM146.9m.

Downgrade to MARKET PERFORM. Following the adjustment in earnings, we are also downgrading our call on SUNCON from OUTPERFORM to MARKET PERFORM with a lower SoP-based Target Price of RM1.77 (previously, RM1.81). Our TP of RM1.77 implies FY17E PER of 15.7x which is still close to the lower end of 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 - 24 Feb 2017