SUNCON’s 1H17 CNP of RM67.6m is within our expectations but below consensus, at 47%/44% of full-year estimates, respectively. Single-tier interim dividend of 3.0 sen proposed. No changes to FY17-18E core earnings. Downgrade to UNDERPERFORM from MARKET PERFORM with an unchanged SoP-driven Target Price of RM2.00.

In line. SUNCON’s 1H17 Core Net Profit (CNP) of RM67.6m was within our but below consensus expectations, accounting for 47% and 44% of respective full-year estimates. We believe that consensus could be slightly aggressive on their construction progressive billings and margins assumptions. Single-tier interim dividend of 3.0 sen was proposed, compared to our full-year estimates of 4.0 sen. We believe that there is potential upside to its dividends compared to our conservative assumptions as SUNCON has paid out higher than its minimum pay-out policy of 35% in the past and we are looking forward to upgrade post clarification with management

Results highlight. 1H17 CNP registered YoY growth of 9% despite a 2% decline in revenue, mainly due to the PBT margin improvements in its construction division from 6% to 9%, which drove its construction PBT up by 37%. The improvement in construction margins are driven by better margin jobs coupled with reversal of doubtful debts.

On QoQ basis, 2Q17 CNP was flattish (-1%) despite its construction division registering decent growth rates in both revenue and pre-tax profits of 10% and 28%, respectively. The decent performance by its construction division was dragged down by its pre-cast division, which saw its revenue and PBT down by 56% and 60%, respectively. The sharp decline in its pre-cast segment was mainly due to the slower construction progress by the main contractor, while its new jobs secured will only be contributing from next year onwards.

Outlook. For FY17, we believe that SUNCON is on track to meet their and our orderbook replenishment target of RM2.0b, given that it has already secured RM0.6b worth of jobs year-to-date excluding its MRT2 station works, which is expected to be lumpy. We are also expecting SUNCON to at least bag a package of civil works from LRT3. Its current outstanding order book stands at RM4.3b providing earnings visibility for the next 2-3 years. Post results, there are no changes to our FY17- 18E earnings.

Downgrade to UNDERPERFORM. While we still like SUNCON for its pure exposure to the construction industry and ability to secure big- ticket infrastructure projects, we are downgrading the stock to UNDERPERFORM with an unchanged SoP-driven Target Price of RM2.00 (previously, MARKET PERFORM) as its share price had rallied by 38% since beginning of the year to steep valuation levels of FY18 PER of 18.2x vs big-cap peers’ average of 18.0-20.0x or FBMKLCI FY18 PER of 15.6x. However, we shall relook to upgrade the stock should any fresh catalysts emerge in the mid-to-near term or if there are share price retracements as we remain confident of the group’s prospects.

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 - 25 Aug 2017