INVESTMENT HIGHLIGHTS

• Results slightly behind expectations

• Better progress billings steered improvement

• Precast PBT turned red, due to expanded cost

• Earnings adjusted to fine-tune bottom line assumptions

• We maintain BUY with revised TP of RM1.78 (from RM1.95)

Results slightly below the line. 3QFY18 earnings of RM36.4m (+8.0%yoy) lagged ours and the Street’s expectation. Cumulatively, the net profit in 9MFY18 accounted for 68.2% and 68.9% of ours and consensus’ full-year forecasts respectively. However, the silver lining was that SCGB‘s 3QFY18‘s total revenue of RM557.3m (+13.4%yoy) came in stronger as a result of better contribution from the construction segment at the tune of RM524.1m.

Better progress billings steered the improvement. Construction revenue advanced by +11.1%yoy, due to higher progress billings rate and better margin fetched under the civil division. This was below our expectation as we had previously estimated higher margin for SCGB’s projects. Notably, it is worth mentioning that margin ratio (of PBT) improved by +0.9ppts yoy to 9.3%, owing to the final stage completion of construction projects.

Contribution from Pre-cast segment seemed improving, but profitability turned red, recording PBT loss of –RM1.9m. While the segmental contributions have been stable at +RM30m in the previous three quarters, YTD margin was weighed down by continued margin compression.

Short-term pressure on ASP is likely. Despite the better revenue recognition from existing sales order, the pressure on ASP continued to linger due to intense competitive landscape. Notwithstanding this, the pre-cast segment is expected to contribute positively, driven by its replenishment ability and expectation of better margin drawn from the new orders clinched. Relatively, the strategic location of its pre-cast factories in Johor and Singapore will allow it to capitalize on shorter distances to its key clients’ premises, which will lend support to better cost structure. As of 3QFY18, the segment’s current outstanding sales order stands was at RM226.0m.

Construction activities to remain resilient. In 3QFY18, the segment accounted 94% of the group’s total revenue. Cumulatively, the 9MFY18 revenue grew by +22.8yoy to RM1.63b. The revenue recognized was in line with our expectation, accounting for 78.5% our yearly segmental estimates. We attribute the group’s better performance to finalization of account for projects completed in the quarter. Per recent announcement, the group’s outstanding order book currently stands at RM5.2b, implying 2.5x of revenue cover. The figure was arrived subsequent to its RM1.3b worth of project wins in FY18, which was in line with the management’s replenishment target of RM1.5b.

We are mindful of the potential impact from significant cost revision of mega infrastructure projects namely LRT3 (-47.0%) and MRT2 (-23.0%). The impact to sub-contractors is still uncertain as the final outcome will lie on the decision arrived between main-contractor and sub-contractors on the projects’ scopes and schedules, to name a few. Notwithstanding this, the group’s short-term prospect seems healthy, on the back of its stable order book of RM5.2b. We recall that average order book figure over the past five years stood at RM4.3b. In the light of uncertain business environment, we consider the group’s outstanding orders as sizeable, providing firm underlying base to short and medium term income.

Earnings revision. We adjust our earnings lower by –9.6% and –12.3% for FY18 and FY19 respectively, on the account of lower margin assumption. The uncertainties over MRT2 and LRT3 work packages still remain, pending further clarity from management. We should highlight that our FY19 assumptions provide a base case estimates, predicated on the current work progression.

Recommendation. All things considered, we maintain our BUY call with adjusted TP of RM1.78 pegging its FY19 EPS to PE of 15x. We are encouraged by the 1) group’s healthy financial position, and 2) large order backlog which should bode well with its future value accretion.

Source: MIDF Research - 21 Nov 2018