1Q19 CNP of RM14.1m came in-line, making up 20%/21% of our/consensus full-year expectations. No dividends declared, as expected. No changes to FY19-20E earnings. Maintain MARKET PERFORM with unchanged Target Price of RM1.40 based on FY20E PER of 10.0x.

Within expectations. 1Q19 CNP of RM14.1m came in-line, making up 20%/21% of our/consensus full-year expectations. No dividends declared, as expected.

Results highlight. 1Q19 CNP grew 7%, YoY driven by decent revenue growth of 11%, despite a mild decline in pre-tax margin to 13% (-1ppt). The growth in revenue is driven by both of construction and property divisions, which grew 10% and 21%, respectively. While the compression in margin stems from its construction division, which saw pre-tax margin falling to 10% (-2ppt) due to higher billings of lower margin jobs coupled with rising overhead costs. QoQ, 1Q19 CNP saw decent growth of 23% despite a 3% slide in revenue, thanks to the improvement in pre-tax margin driven by construction division, which registered fairly decent improvement in margin to 10% (+5ppt), which we believe was due to higher composition of better margin jobs recognised and absence of year-end bonus payments. That aside, its net interest income also increased by 188%.

Outlook. We believe that the overall construction pace for its existing projects like Pan Borneo (c.45%), Miri and Kuching Waste Water are progressing smoothly at c.55% and 15% respectively. As such, we anticipate higher construction billings in FY19 as its major on-going projects move into more mature stages. Its current outstanding order book stands at c.RM2.5b providing 3 years visibility.

Earnings estimates. No changes to our FY19-20E earnings for now as earnings came in within our expectations.

Maintain MARKET PERFORM with an unchanged Target Price of RM1.40 based on FY20E PER of 10x. We base our TP on FY20E PER of 10.0x which is close to its 5-year -1.5SD level, at the higher end of the ascribed 6-11x PER valuation range of small-mid cap contractors.

Risks to our call include higher/lower-than-expected job wins, accelerated/delayed construction billings progress and higher/lower than-expected construction margins.

Source: Kenanga Research - 24 May 2019