FY17 CNP of RM134.0m came in below expectations at 92%/90% of our/consensus’ full-year expectation. Full-year dividend of 7.0 sen is above our estimate of 4.0 sen. Raised FY18E CNP marginally by 1.7% and introduces FY19E CNP of RM192.8m. Maintain MARKET PERFORM with a slightly higher SoP-driven Target Price of RM2.30 (previously, RM2.29).

Below expectations. FY17 CNP of RM134.0m came in below expectations at 92%/90% of our/consensus’ full-year estimates. The shortfall is due to the weaker-than-expected performance from its pre- cast division owing to timing issues. A 4.0 sen dividend was declared, bringing full-year dividend declared to 7.0 sen, above our full-year expectation of 4.0 sen.

Results highlight. FY17 CNP grew 14%, YoY underpinned by a strong revenue growth of 16% backed by the construction division. Its construction division registered revenue growth of 29% thanks to higher work progress from Parcel F, Putrajaya, and KVMRT V201 from Sg Buloh to Persiaran Dagang coupled with the finalisation of the earlier KVMRT V4 package from Seksyen 16 to Semantan Portal. That said, its construction pre-tax margin also saw improvement by 2ppt to 8%. QoQ-wise, 4Q17 CNP was down by 7% despite a strong revenue growth of 52% as its construction division registered lower pre-tax margins of 6% (-3ppt) coupled with the higher effective tax rate of 27%.

Outlook. SUNCON’s outstanding order-book now stands at RM6.1b providing earnings visibility for the next 2-3 years and management has raised its order-book replenishment target of RM1.5b to RM2.0b for FY18 in view of the slew of infrastructure jobs available in the market coupled with jobs from Sunway group. That said, SUNCON is also participating in the bid for PDP role in KL-SG High Speed Rail of which we believe they stand a good chance in competing with players like GAMUDA.

Marginal tweak in FY18 earnings. Post results, we also raised our FY18 replenishment target to RM2.0b (previously, RM1.0b) in accordance with management’s new target. Following the hike in order- book replenishment assumptions and lower billings recognition for its pre-cast division by half and fine-tuned pre-tax margins, this resulted in a marginal adjustment to our FY18E CNP (+1.7%). At the same time, we also take the opportunity to introduce our FY19E CNP of RM192.8m

Maintain MARKET PERFORM. We reiterate our MARKET PERFORM call on SUNCON with a higher SoP-driven Target Price of RM2.30, backed by massive outstanding order-book of RM6.1b. Our TP of RM2.30 implies FY18E PER of 16.9x, 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 - 27 Feb 2018