9MFY19 CNP of RM97.7m accounted for 79%/70% of our/consensus full year expectations. The results at the CNP level exceeded our expectation due mainly to lower effective tax rate. While our PBT forecast for FY19 is trimmed, we maintain CNP for the full year on account of lower tax rate. Maintain UP with unchanged SoP-driven TP of RM1.45.

CNP exceeded our expectation and below consensus. 9MFY19 CNP of RM97.7m made up 79%/70% of our/consensus full year expectations, while pretax profit of RM116.9m came in at 71% of ours. The effective tax rate was just 7.1% in 3QFY19 and 16.5% for the 9MFY19 (versus 20.3% for 9MFY18) mainly due to tax exempt interest income and overprovision of tax in the prior year.

Results highlight. 3QFY19 PBT came in at RM35.6m (-24.1% YoY and -13.7% QoQ) on the back of revenue of RM402.6m (-27.8% YoY and -8.5% QoQ). The continued delay in LRT 3 package GS0708 and the fact that a majority of its existing projects are at initial stages are reasons why revenue and profit were lower. The progress of LRT3 is particularly disappointing given that as at end 3Q, the company reported an outstanding orderbook of RM1,882m versus RM1,817m at the end of 2Q, implying the delivery of works for the quarter at merely RM65m. The contract value of RM1.82bn in the LRT3 represents close to one-third its total outstanding orderbook of RM5.6bn – its single largest project. Property development projects contracted from the Sunway group that makes up another RM1.8bn of orderbook are progressing at a slow pace. The good news is that its precast segment which broke even the last quarter has turned in a small PBT of RM0.2m (vs a loss of RM1.9m a year ago). However, this segment remains too small to make a significant positive impact.

On a cumulative 9M basis, 9MFY19 revenue of RM1,283m (-21.3%) and PBT of RM117m (-13.8%) declined due to decline in earnings from the construction division as the civil and building divisions’ jobs are mostly at their early stages. However, PBT margins were higher (from 8.3% to 9.1%) due to recognition of a final account.

Suncon’s new order secured in 2019 rose during the quarter from RM1.5bn to RM1.7bn resulting in an outstanding order book at RM5.6bn which provides 2.5 years visibility. We have lowered our FY19 expectations at the pretax profit level from RM164m to RM152m. While we cut our PBT forecast for FY19 by 7%, our forecast at the CNP level remains unchanged at RM123m on account of the lower tax rate realised in the 3Q. We leave our forecast for FY20 unchanged on expectation that its construction projects especially the LRT3, will gather pace next year.

Maintain UNDERPERFORM with unchanged SoP Target Price of RM1.45, arrived at by applying a 11x PE to FY2020 earnings – at the top end of our universe ascribed range of 6 – 11x for the sector - and 55% discount to cash.

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 Nov 2019