FY18 CNP of RM139.9m came in within expectations, making up 100%/95% of our/consensus full-year estimates. A 3.5 sen dividend was declared, bringing full-year dividend declared to 7.0 sen, within our estimate. No changes to FY19E CNP, introduces FY20E CNP of RM150.3m. Maintain UNDERPERFORM with an unchanged SoP-driven Target Price of RM1.40.

Within expectations. FY18 CNP of RM139.9m came in within expectations, making up 100%/95% of our/consensus full-year estimates. A 3.5 sen dividend was declared, bringing full-year dividend declared to 7.0 sen, within our estimate.

Results highlight. For FY18, SUNCON registered CNP growth of 4% underpinned by revenue growth of 9%, YoY. The growth in CNP was mainly driven by its construction division, which registered 24% growth in pre-tax profits backed by: (i) revenue growth of 10%, and (ii) improvements in pre-tax margins from 7.6% to 8.6%. As for its pre-cast division, it only registered RM1.0m in pre-tax profit which represents a decline of 96%, YoY, due to recognition of lower margin jobs, which was secured under stiff competition. QoQ, 4Q18 CNP saw a marginal decline by 4% albeit registering revenue growth of 12% as its construction division pre-tax margins came down to 8.4% (-0.9ppt), and its precast division losses widened by 48%, QoQ. Its precast division continued to register losses due to decline in revenue (-8%) which resulted in further margin erosion.

Outlook. The sector outlook 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 coupled with an existing tender-book of RM6.0b and their intention to participate in overseas projects, i.e. Myanmar and India.

Earnings unchanged. Post results, there are no changes to our FY19E CNP of RM145.1m, and we take the opportunity to introduce our FY20E CNP of RM150.3m.

Maintain UNDERPERFORM. We reiterate our UNDERPERFORM call on SUNCON with an unchanged SoP-driven Target Price of RM1.40 which we ascribed an 11.0x to its FY19E Core EPS. Our Target Price of RM1.40 implies 12.1x FY19E PER which is at a higher range to our ascribed multiple of 11.0x for the sector.

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 - 26 Feb 2019