1H18 CNP of RM68.5m is below our/consensus expectations at 39%/41% due to: (i) lower-than-expected construction billings, and (ii) its relatively weak pre-cast division due to stiff competition and high steel prices. 3.5 sen dividend was declared as expected. Lowered FY18-19E CNP by 15-9%, respectively. Downgrade to UNDERPERFORM with a lower TP of RM1.80 (previously, MP, TP: RM1.95).

Below expectations. 1H18 CNP of RM68.5m came in below our and consensus expectations at 39% and 41%, respectively. The shortfall in our/consensus expectations could stem from: (i) lower-than-expected construction billings, and (ii) its pre-cast division which performance had been relatively weak due to stiff competition and high steel prices. 3.5 sen dividend was declared as expected, hitting 50% of our full-year estimates.

Results highlight. For 1H18, SUNCON registered decent revenue growth of 28%, YoY, mainly driven by its construction division. However, 1H18 CNP growth was flattish at only 1% as they experienced margin compression where pre-tax margin fell from 10% to 8%, coupled with the higher effective tax rate of 19% (+1ppt). The contraction in margin is mainly from its pre-cast division, which saw pre- tax margin compressed from 22% to 8% due to higher steel bar prices compared to tender price as steel content contributed to approximately 30% of its total cost coupled with stiff competition on pricing. QoQ, 2Q18 CNP was also flattish due to similar reasons mentioned above.

Outlook. Due to the uncertainty in the construction sector, management reviewed their order-book replenishment target from RM2.0b to RM1.5b, which we believe is reasonable as we expect minimal or no infrastructure project awards to be rolled out this year due to the project reviews undertaken by the government. To date, SUNCON has secured RM854.0m worth of replenishment where the bulk is from its parent SUNWAY. Positively, its outstanding order-book of RM5.8b still provides SUNCON 3-year visibility. In the medium term, SUNCON might consider participating in overseas projects, i.e. Myanmar and India.

Earnings maintained. Post results, we downgraded our FY18-19E CNP by 15-9%, respectively, after (i) reducing our FY18E order-book replenishment assumptions from RM2.0b to RM1.5b in line with the management's new target, and ii) lowering our margin assumptions for its pre-cast division.

Downgrade to UNDERPERFORM. Following our downward earnings revision, we also downgraded SUNCON to UNDERPERFORM with a lower SoP-driven Target Price of RM1.80 (previously, MP, TP: RM1.95). Despite our downgrade due to earnings revision, we still like SUNCON for its strong parentage, which could help them weather through the challenging times, especially when there is a lull in infrastructure projects in the country. We believe that should the government restart most of the infrastructure projects SUNCON would be one of the first few to benefit owing to their strong track record in the Malaysia construction scene. At our TP of RM1.80, it implies FY19E PER of 13.3x which is below its 3-year -1SD levels. Our ascribed multiple of 12.0x is in line with the range of 12.0-14.0x applied to the big boys.

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 - 17 Aug 2018