We are positive on the RM781.3m contract from TENAGA as the construction timeline is shorter than expected, albeit it being within our order-book replenishment assumptions of RM1.5b. We raised our FY19E earnings by 8% after factoring in the shorter execution timeline. Maintain UNDERPERFORM with a higher SoP-driven Target Price of RM1.40 (previously, RM1.30).

Bags TNB HQ Campus (Phase 2). Yesterday, SUNCON announced that they have won a construction job from Tenaga Nasional Bhd (TENAGA) worth RM781.3m. The scope of work includes the proposed construction of four office towers, one convention centre, one interactive centre for electricity, child care facility and other facilities to house TENAGA’s employees. The construction work for the campus is expected to be completed within 26 months upon commencement, shorter compared to typical high-rise jobs, which easily takes up to 36 months. We believe that the shorter construction timeline is solely on superstructure works as the substructure works for the campus could be completed prior to this award.

Positive surprise on timeline. This is SUNCON’s first contract win for the year and one of the largest to date. While the contract award of RM781.3m came in within our and management’s replenishment target of RM1.5b for FY19, the construction timeline for this particular came in as a surprise to us as it is 10 months shorter compared to our assumptions of 36 months. Assuming pre-tax margin of 8%, this particular contract would contribute c.RM21.6m to its bottom-line per annum.

Outlook of the sector remains uncertain due to the recent review of government spending on infrastructure jobs. However, we believe strong players like SUNCON can weather through these challenging times given their strong parent (SUNWAY)’s support and competitiveness to secure huge jobs from the private sector. For its upcoming 4Q18 result that is set to be released on 25th February 2019, we expect SUNCON to register a performance that falls within our expectations.

Earnings tweak. Following this contract win, we raised our FY19E CNP by 8%, as we have factored in the shorter execution timeline for this project.

Maintain UNDERPERFORM. Nonetheless, we maintain our UNDERPERFORM rating due to the strong performance of its share price, which has registered a year-to-date gain of 24.8%. Following the revision in earnings, we also raised our SoP-driven Target Price higher to RM1.40 (previously, RM1.30). We ascribed 11.0x FY19E PER which is the highest valuation range within our stock coverage universe range of 6-11x.

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 - 20 Feb 2019