1Q18 CNP of RM35.8m came in within our but below street expectations at 20% and 19%, respectively. The shortfall to street expectations could stem from the weak performance of its pre-cast division. No dividend proposed, as expected. No changes to FY18-19E earnings. Maintain OUTPERFORM with a higher SoP-driven Target Price of RM2.40 (previously, RM2.30).

Within our, below street. 1Q18 CNP of RM35.8m came in within our but below street expectations at 20% and 19%, respectively. We believe the shortfall to street expectations could stem from its pre-cast division which performance has been relatively weak due to stiff competition and high steel prices. No dividend proposed for the quarter but we will be expecting full-year dividend of 7.0 sen.

Results highlight. 1Q8 CNP grew 5%, YoY underpinned by a decent revenue growth of 26% that is backed by its construction division. Its construction division registered strong revenue growth of 40%, thanks to higher work progress from Parcel F, Putrajaya, and International School of Kuala Lumpur, cushioning the weak performance of its pre- cast division which saw a 77% decline in pre-tax profit. QoQ, its 1Q18 revenue was down by 29%, but registered 12% growth in CNP thanks to improvement in pre-tax margins of 3ppt to 8% coupled with lower effective tax of 18% compared to 27% in 4Q17. That said, its pre-cast division also registered better performance with 41% growth in revenue and 19% improvement in pre-tax profit.

Outlook. Despite the uncertainty in the construction sector arising from the change in government, we believe that it is “business as usual” for SUNCON given their strong parent company (SUNWAY)’s support and strong track record in securing projects from both government and private sector. Hence, we are maintaining our order-book replenishment of RM2.0b at this junction. That said, we believe its earnings remain intact backed its strong order-book of RM6.3b with three-year rs visibility.

Earnings maintained. Post results, we make no changes to our FY18- 19E earnings.

Maintain OUTPERFORM. We reiterate OUTPERFORM on the stock with a higher SoP-driven Target Price of RM2.40 (previously, RM2.30) as we roll forward our valuation base year to FY19E with a lower PER of 15x (previously, 16x) due to uncertainty arising from the change in government. However, we believe that it would not have any major impact on SUNCON given their ability and competitiveness in the construction scene coupled with a strong order-book of RM6.3b. At our TP of RM2.40, it implies FY19E PER of 15.4x.

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 - 18 May 2018