INVESTMENT HIGHLIGHTS

• SunCon reported -19.1%yoy lower revenue in 2QFY19 at RM440.2m compared to the same period last year

• Construction contributed 92.3% of revenue in 2QFY19, but posted -20.6%yoy decline

• Contribution from pre-cast was still insignificant in 2QFY19, despite +3.7%yoy increase in quarterly revenue

• Replenishment stood strong, RM1.5b target already met

• No changes to earnings, in view that the results were large expected

• Maintain BUY call with unchanged TP of RM2.21

SunCon’s revenue was lower by -19.1%yoy in 2QFY19 at RM440.2m in comparison to last year’s. Cumulatively, the quantum dipped -18.0%yoy to RM880.2m in 6MFY19. In terms of PATANCI, the group posted RM33.2m in 2QFY19, registering cumulative earnings of RM64.2m in 6MFY19. Accordingly, this constitutes 42.0% and 49.4% of our and consensus’ full year estimates. While it could be perceived as coming in below our expectation (based on common convention), we believe the result was broadly in-line given the retiming issues of certain high-value projects in 1HFY19.

Construction contributed 92.3% of revenue in 2QFY19. During the quarter, the segment posted a decline of -20.6%yoy in revenue compared to the same period last year. The deviation was a result of lower revenue from Parcel F project in Putrajaya which has already approached completion. Based on our estimates, the remaining unbilled job of the Parcel F project will be fully booked by this year. Other underpinning factor was retiming issues with LRT3 package, which has delayed income recognition. Nonetheless, we expect this issue to alleviate in 2HFY19. The recognition of final account in some projects has caused improvement in the group-wide profit margin. In particular, blended margin of PATANCI has risen by +1.0pptsyoy in 2QFY19, compared to 2QFY18.

Contribution from pre-cast was insignificant in 2QFY19. Despite its +3.7%yoy higher quarterly revenue of RM33.9m, PBT in 2QFY19 was only breakeven with subdued margin of 0.1%. The result was uninspiring, given the low-price impact from previous jobs secured when competition was intense. We understand the subsequent orderbook clinched was expected to fetch better margin from price improvement in CY18. We noted that its pricing for pre-cast products has increase by more +20% since last year. In recognition of this, earnings improvement is likely to manifest toward CY19 year-end or beginning CY20.

Replenishment stood strong, with RM1.5b target already met. SunCon’s replenishment rate has been laudable, despite a broad-based slowdown in the local construction scene. Consequently, we expect its earnings to remain in sound footing as it ramps up activities for large scale projects. SunCon currently sits on RM5.8b worth of unbilled jobs, giving it 2.6x FY18 revenue visibility down the road.

Dividends. SunCon has proposed its first interim dividend 3.5 cent per share for the FY19, implying 70% payout.

Earnings revision. We make no changes to earnings, in view that the results were large expected.

Recommendation. All things considered, we maintain our BUY call with unchanged TP of RM2.21 pegging its FY20F EPS to PE of 18x (+1std of 1-year average). The higher multiple is reflective of the improved sector wide sentiment for construction, following the return of ECRL and continuation in Bandar Malaysia projects, as well as the strength of SunCon replenishment capability. All in, 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 - 20 Aug 2019