Last Friday, SUNCON announced that their HL-SUNCON JV has won the bid for the lease of land for the development of ICPH in Singapore to construct another pre-cast plant. We are long-term positive on the development, as we believe this would strengthen their presence in Singapore. No changes in FY18-19E numbers. Maintain MARKET PERFORM with an unchanged SoP-driven Target Price of RM1.95.

Bags ICPH award. Last Friday, SUNCON announced that their HLSUNCON JV (HL Building Materials Pte Ltd: 51% and Sunway Concrete Products (S) Pte Ltd: 49%) in Singapore has won the bid for the lease of land for the development of the Integrated Construction Prefabrication Hub (ICPH) from Building and Construction Authority of Singapore (BCA). The land is located in Pulau Punggol Barat with a lease term of 30 years and costs SGD25.7m (inclusive of land price and administrative fees).

Long-term positive. We are long-term positive with SUNCON participating in ICPH to setup another pre-cast factory in Singapore despite the current weak market. We believe the move would enable them to strengthen their presencein Singapore in the long-run, especially when pre-cast building technology is picking up due to consistency in built quality. To date, BCA has awarded five land tenders for the development of ICPH. Management have budgeted an investment capex of SGD80.0m for their 49% stake for the construction of the new plant that will take up to three years, which would not have much impact on their balance sheet due to their strong net cash position. Upon completion, it would be a fully mechanised plant with a total capacity of 100,000m3 per annum, and we remains hopeful by then they would be able to penetrate the private market in a larger scale as the usage of pre-cast picks up.

Outlook. We believe that theoutlook remains promising for SUNCON given their strong parent (SUNWAY) support, coupled with strong track record in securing projects from both government and private sectors. Hence, we are maintaining our order-book replenishment of RM2.0b at this juncture. That said, we believe its earnings outlook remains intact backed its strong order-book of c.RM6.4b with visibility of three years.

Earnings maintained.We make no changes to our FY18-19E earnings for now, but might look to review our numbers in the upcoming results season.

Maintain MARKET PERFORM. We reiterate MARKET PERFORM on the stock with an unchanged SoP-driven Target Price of RM1.95. While we remain confident with SUNCON’s competitiveness in the market, the recent review of LRT3 by the government mayresult in the progress recognition timeline to be extended, this would cause downward revision in earnings due to timing issue, as we would need to stretch out our earnings recognition for the particular project. Nonetheless, we are only looking to review our numbers in the upcoming results season pending more clarity and details from both management and the government.

Upside 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 - 30 Jul 2018