1Q19 CNP of RM29.1m makes up 20%/19% of our/consensus full-year expectations. We deem the performance as below our expectation, due to slower-than- expected progressive billings, mainly stemming from LRT3 and MRT2, as both projects’ costs have yet to be finalised. No dividends proposed as expected. Reduced FY19E CNP by 15%, while keeping FY20E unchanged. Maintain UP with an unchanged SoP-driven TP of RM1.40.

Below expectations. 1Q19 CNP of RM29.1m makes up 20%/19% of our/consensus full-year expectations. We deem the performance to be below expectations, due to slower-than-expected progressive billings mainly stemming from LRT3 and MRT2, as both projects’ costs have yet to be finalised. No dividends proposed, as expected.

Results highlight. 1Q19 CNP decreased by 15%, YoY dragged by lower revenue (-17%). The decrease in revenue stemmed from both the construction (-17%), and pre-cast (-11%) divisions, due to: (i) construction performance bogged down by slower work progress from LRT3 and MRT2, (ii) pre-cast division affected by timing as bulk of its jobs secured previously will only commence on a later date which we presume to be in 2H19, and (iii) higher effective tax of 21% (+3ppt). QoQ, 1Q19 CNP fell 17% due to similar reasons above, except that this time around, its pre-cast division registered pre-tax profit of RM0.1m vis-à-vis pre-tax loss of RM2.9m in 4Q18, attributable to a pick-up in work orders coupled with lower rebar costs.

Outlook. We remain unexcited with the near-term prospects in the construction sector, despite the revival of ECRL, re-tendering of KVDT, and potential infrastructure works from Bandar Malaysia as we believe that the awarding of these projects would only take place earliest by 4Q19/1Q20. However, we believe strong players like SUNCON can weather through these challenging times given their strong parentage (SUNWAY) support and competitiveness to secure huge jobs from the private sector and achieve both our and management’s RM1.5b replenishment target for the year. Its outstanding order-book of RM5.7b provides 2.5 years of visibility.

Earnings review. Post results, we lowered our FY19E CNP by 15% to RM122.9m, as we rescheduled our progress recognition for LRT3 and MRT2 to a later date, while keeping our FY20E earnings intact as we believe that work progress would pick up pace by then.

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 PER to its FY20E Core EPS. However, our SoP-driven TP of RM1.40 which includes cash implies FY20 PER of 12.1x, which is higher than our universe’s ascribed valuation range of 6- 11.0x for the sector, and close to KLCON’s 10-year average of 13.3x.

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 May 2019