Yesterday, SUNCON bagged RM2.2b contract award from LRT3 bringing its year-to-date win to RM3.5b (excluding MRT2 S201) surpassing our FY17 order-book replenishment of RM2.0b by 75%. FY17E earnings remains unchanged but we raise FY18E earnings by 18% after factoring in higher order-book replenishment. Upgraded our call to MARKET PERFORM with a higher SoP-driven Target Price of RM2.29 (previously, UP; TP: RM2.00).

LRT3 in the bag. Yesterday, SUNCON announced that they have secured a contract award from LRT3 amounting to c.RM2.2b. This particular contract award consists of two packages combined, which is Package GS07-08, and SUNCON is required to complete the guideway, stations, iconic bridge, park and rides, ancillary buildings and other associated works within 36 months.

Positive on the win! We were positively surprised with the win as we did not expect such a huge contract from LRT3. Furthermore, the contract award of c.RM2.2b have brought its year-to-date win to RM3.5b (excluding MRT2 S201) surpassing our FY17 order-book replenishment assumption of RM2.0b by 75%. Assuming pre-tax margin of 8%, this particular contract will contribute c.RM43.5m to its bottom-line per annum.

Outlook. Post LRT3 job win, SUNCON’s outstanding order-book now stands at RM6.5b providing earnings visibility for the next 2-3 years. Going forward, we believe that SUNCON might look to focus on its on- going projects and more selective in their future jobs selections, which command better margins.

Upgrade FY18E earnings. While we are keeping our FY17E earnings unchanged, we raised our FY18E earnings by 18% after we factored in a higher order-book replenishment of RM4.0b vis-à-vis our initial assumptions of RM2.0b for FY17. With the new assumptions, we have remaining replenishment of RM500.0m to be achieved in FY17. However, we reduced our FY18E order-book replenishment of RM2.0b to RM1.0b as SUNCON might look to focus on the execution of its on- going projects.

Upgrade to MARKET PERFORM. Following LRT3 job win and our upgrade in FY18E earnings, we also raised our SoP-driven Target Price accordingly to RM2.29 (previously, RM2.00). Subsequently, we also upgraded our recommendation from UNDERPERFORM to MARKET PERFORM for its strong capability in securing such big-ticket projects. At our TP of RM2.29, it implies FY18E PER of 17.1x trading close to big-cap peers’ average of 18.0-20.0x.

Risks to our call include: (i) higher-than-expected margins/order-book replenishment, and (ii) higher government spending on infrastructure and affordable housing projects.

Source: Kenanga Research - 06 Oct 2017