9M19 CNP of RM521.2m came in above expectations, making up 88%/85% of our/consensus full-year estimates. The positive deviation is mainly due to better than expected margins from both its construction and property development divisions. 6 sen dividends were declared, bringing 9M19 to 12.0 sen as expected. Raised FY19-20E earnings by 15%-17%, respectively. Upgrade to MP with higher SoP-driven TP of RM3.75 (from UP; TP: RM2.90)

Above expectations. 9M19 CNP of RM521.2m came in above expectations, making up 88%/85% of our/consensus full-year estimates. The positive deviation is mainly due to better than expected margins from both its construction division. 6 sen dividends were declared, bringing 9M19 to 12.0 sen as expected.

Results highlight. 9M19 CNP came off by 15%, YoY due to: (i) decline in contributions from joint-ventures from both its construction and property divisions, which recorded lower pre-tax profit of 14% and 27%, respectively. Positively, its own property division registered improvements in margin from 8% to 11% registering EBIT growth of 59% backed by its revenue growth of 14%. QoQ, 3Q19 revenue decline by 8%, but registered flattish CNP growth of 2%, driven by better EBIT margins of 19% (+5ppt) as an improvement from all of its divisions, especially property division, which saw EBIT margin grew to 14% (+6ppt).

Briefing highlights. The briefing is well attended by more than 50 people consisting of analysts and bankers. This time around, management is bullish on Penang Transport Master Plan (PTMP) as they believe that the Penang state government could have found the funding solutions in executing LRT and PIL1 (estimated to be c.RM16.0b), which could be partly from Federal government and financing from Asian Development Bank or any other banks. Management is optimistic that should the funding issue is resolved; PTMP might commence by mid-2020 earliest. That aside, management also highlighted their move to overseas which they have already set up an office in Australia with a staff force of 60 to tender for AUD15.0b worth of infrastructure jobs, which we believe to be a swift move by management in diversifying their earnings profile geographically after the sale of its highway concessions. Lastly, management also indicated potential special dividend from the proceeds of its highway concession sales, and also stressed that they would strive to maintain their existing 12.0 sen dividend per share pay-out in the near future.

Earnings revision. Post briefing, we raised our FY19-20E earnings by 15%-17% as we adjusted our conservative construction pre-tax margins higher to 9% (from 4.5%). Previously, our margin assumptions were too conservative due to the cost rationalization of MRT2.

Upgrades to MARKET PERFORM as we are feeling much positive after the briefing due to management’s affirmation on maintaining its existing dividend pay-out of 12.0 sen per share and indication of a special dividend post sale of its highway concession. Hence, we raise our SoP-driven Target Price upwards to RM3.75 (vs. RM2.90 previously), as raised our construction earnings, and narrowed our RNAV discount to 55% (from 70%) on improving property earnings backed by strong overseas contributions. Our TP implies FY20E PER of 15.9x, is higher as compared with our universe ascribed multiple range of 6-11x and also KLCON’s 10-year average of 13.3x.

Risks to our call include: (i) ahead of schedule/unexpected delay of MRT2 project, (ii) lower/higher-than-expected input costs, and (iii) higher/lower-than-expected property sales.

Source: Kenanga Research - 28 Jun 2019