FY19 CNP of RM129.3m met expectations, accounting for 105%/98% of our/consensus numbers. Forward earnings will be underpinned by outstanding order-book of RM5.2b, following contract wins of RM1.8b last year. We are upgrading our call to OUTPERFORM with TP of RM2.15 (based on P/E of 16.5x on FY20 earnings) (from RM1.45 previously).

Within expectations. FY19 CNP of RM129.3m (-10.5% YoY) accounted for 105%/98% of our/consensus estimates with top-line declining 21.6% YoY to RM1.8b. Overall earnings fell as the Group’s performance was dragged by lower net profit contribution of RM125.9m (-12.1% YoY) from the construction division. Meanwhile, the precast concrete segment contributed net profit of RM3.4m in FY19 (up from RM1.1m in FY18). It declared DPS of 3.5 sen, taking full-year DPS to 7.0 sen.

Results’ highlight. 4QFY19 CNP came in at RM31.6m (-5.6% QoQ/- 13.3% YoY) on the back of turnover of RM485.9m (+20.7% QoQ/- 22.4% YoY). In terms of segmental breakdown, in the final quarter: (i) the construction division posted net profit of RM28.0m (-17.2% QoQ/- 27.1% YoY); and (ii) the precast concrete business contributed net profit of RM3.7m, turning around from net losses of RM0.3m in 3QFY19 and RM1.9m in 4QFY18. On the margin front, pretax profit margin stood at 8.6% in 4QFY19 (versus 9.7% in 3QFY19 and 8.4% in 4QFY18) for the construction division, bringing full-year margin to 9.6% (from 8.6% the year before). Precast concrete division’s pretax profit margin also rose, to 1.8% in FY19 from 0.7% in FY18. As of end-Dec last year, the Group is in a net cash position of RM407m (or 32.0 sen per share).

Strong earnings visibility ahead. SUNCON secured new contracts totalling RM1.8b in FY19 (versus RM1.6b in FY18). This has lifted outstanding order-book to RM5.2b as of end-Dec 2019, which will underpin forward earnings and represents 3.2 times last year’s construction revenue. The Group is targeting an order-book replenishment of RM2b in FY20 (which is also our new contract wins assumption). We have revised up our net profit forecast to RM169m (+7.6%) for FY20 and RM176m (new) for FY21 after assuming slightly stronger margins and better contributions from the precast concrete segment.

Upgrading call and TP. Applying a higher P/E multiple of 16.5x (which is pegged at +1SD above its 3-year mean) on a stronger earnings base, we have upped our target price from RM1.45 to RM2.15. With potential total returns of 13.3%, we also upgrade our call on SUNCON to OUTPERFORM.

Risks to our call include: (i) lower-than-expected margins/order-book replenishment, and (ii) delays in construction progress.

Source: Kenanga Research - 21 Feb 2020