Results Review

• SUNCON’s 9M19 net profit of RM97.7mn came in below expectations, accounting for 68.8% and 68.9% of our and consensus full-year estimates. The variance was mainly due to slower-than-expected progress of works. Majority of existing jobs are still in initial stages while LRT3 package was delayed due to cost optimisation by the client.

• For 9M19, both the overall revenue and net profit declined by 21.3% and 9.5% to RM1282.8mn and RM97.7mn respectively as construction division reported lower top line (-22.9%) and PATAMI (-6.6%). Meanwhile, precast division sank into minor loss of RM0.3mn from a PATAMI of RM3.0mn recorded in 9M18, mainly dragged by old projects with slim margins.

• QoQ, while the overall revenue was 8.5% lower at RM402.6mn, the lowest quarterly revenue since 4Q16, 3Q19 net profit was marginally higher by 0.9% at RM33.5mn, thanks to lower taxation (-69.2%). The precast division returned to a minor loss of RM0.3mn at PATAMI level.

Impact

• Following the weaker-than-expected results, we make adjustment to revenue recognition and margin assumptions for various projects. All in, earnings forecasts for FY19/FY20/FY21 were cut by 8.0%/6.4%/0.1% respectively.

Outlook

• Its outstanding order book eased slightly from RM5.8bn a quarter ago to RM5.6bn, translating into 2.5x FY18 revenue. This could provide earnings visibility to the group for the next 2 to 3 years.

• For 9M19, the group has secured RM1.7bn of new jobs, versus our order book replenishment assumption of RM2.0bn for FY19. Active tender outstanding is estimated at RM7.4bn.

• To grow its business, the group is actively exploring opportunities in overseas markets. It now targets to secure overseas projects in Myanmar and India by 1H20 after tender exercises for these projects have been delayed by project owners.

Valuation

• Maintain SELL on the stock with a lower target price of RM1.60, from RM1.71 previously, based on 14x CY20 earnings.

Source: TA Research - 20 Nov 2019