Last Friday, SUNCON announced that they have bagged three new contracts cumulatively worth RM186.3m from EPCC works at Gas District Cooling (GDC) Plant 1 in Putrajaya and bore piling works for SUKE and DASH. We are NEUTRAL on these awards as they are within our FY17E replenishment target of RM2.0b. No changes to our earnings. Currently, our call and TP are UNDER REVIEW pending an upcoming sector report.

Three new contracts. Last Friday, SUNCON announced they have secured three contracts from Gas District Cooling (Putrajaya) S/B, Cergas Murni S/B and Usahasama Monza - Latimer. The Gas District Cooling (Putrajaya) S/B job worth RM152.4m entails EPCC works for: (i) a chilled water supply system and (ii) a power generation system at Gas District Cooling (GDC) Plant 1 in Putrajaya slated for completion in Dec 2017 and Aug 2018, respectively. Meanwhile, jobs from Cergas Murni and Usahama Monza – Latimer includes bore piling works at SUKE’s Section B (Cheras to Ulu Kelang) Package CB1 and DASH’s Section A (Puncak Perdana to Kota Damansara) Package CA1 worth RM18.1m and RM15.8m respectively. The SUKE works is slated for completion in April 2018 while DASH works are slated for completion in Jan 2018.

NEUTRAL on the awards. These three external projects are the first few external projects won by SUNCON in 2017, bringing its year-to-date total replenishment to RM635.0m (excluding MRT2 station works). We are neutral on the total win amount, which is already factored in our FY17 order-book replenishment assumptions of RM2.0b. While these projects generally command higher margins, with a conservative pre-tax margin assumption of 6%, it contributes c.RM4.3m to our FY17E earnings of RM145.2m.

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 FY17E replenishment target of RM2.0b is highly achievable, underpinned by anticipated project wins from LRT3, which is expected in the near-term.

Earnings unchanged. We make no changes to our FY17-18E earnings forecasts as these awards are within our FY17E replenishment target.

UNDER REVIEW. As of now, we are placing our recommendation and Target Price (MP; TP: RM1.77) UNDER REVIEW pending our upcoming sector report. However, we do highlight that one of our major concerns for the sector would be earnings risks due to the potential compression in margins.

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 Mar 2017