Sunway Construction Group Bhd (SunCon) is valued higher as Vietnam Song Hau 2 power plant is closer to an award, which will eclipse its FY24F new order target of RM2.5 billion, according to CGS-CIMB.
Consequently, the research house reiterated its ADD rating and lift its SOP-based TP of RM2.70, equivalent to 16.7x FY25F P/E, below its mean of 18x since 2015.
“We also raise our FY24 and FY25F earnings per share (EPS) by 1% and 7% to factor in higher new order wins. We like Suncon for its strong execution track record, ready pipeline from Sunway Berhad, and market-leading return on equities (ROEs) of 18% and 22% for FY23 to FY25F,” it said in its Company Note today (Jan 15).
CGS-CIMB said the biggest catalyst for SunCon is the Song Hau 2 Power Plant Vietnam project where its 55% stake is worth RM6 billion.
“In our view, there were two important milestones which could facilitate this award by mid-CY24F. (The first) is preliminary works not exceeding US$9.5m million (RM45 million), which forms part of the total contract value awarded on Oct 5.
“(Secondly), Toyo Ink Group appointed Export-Import Bank of Malaysia (EXIM Bank) as lead arranger for the syndicated financing facilities, which we believe should help facilitate financial closure for the project on Nov 23.
“We have now built in RM2.8 billion and RM4.3 billion of new orders for FY24 and FY25F compared to RM2.2 billion per annum previously, which only reflect a quarter of its Vietnam project for FY25F.
“Our blended FY24 and FY25F pretax margin for new wins is 7%, below our margin forecast of over 10% for Vietnam,” it said.
Over the last seven years, Suncon has clinched an average of RM1.6 billion to RM4billion new order wins a year, the research house said.
“For FY24F, it has set a new order win target of RM2.5 billion (FY23: RM2.3 billion wins), which will be driven by RM1 billion internal projects from Sunway and data centre and industrial warehouses.”
Additionally, CGS-CIMB believes Suncon will bid for more sizeable data centre projects this year.
“It has two existing data centre projects and progress for the larger RM1.7 billion data centre in Sedenak Tech Park, Johor, 26% of total orderbook of RM5.8 billion, was slow in 2023.
“We believe this has since picked up as the client has seen stronger demand for rentals and is in the midst of negotiating higher lease rates. We view any risk of cancellation as remote as core building and infrastructure are in place, but we have factored in delays.
“In our view, SunCon is a front runner for MRT 3 and Penang LRT and may participate in construction works for Sunway’s recent JV project with Equalbase, a Singapore based property company, to develop a warehouse with multi-tenant facility on 135 acres of land in Johor (GDV of RM8 billion over a 10-year period).
“Assuming construction cost is 50% of gross development value (GDV), this represents RM4 billion of potential orders,” it added.
The key downside risks for the research house’s call are increased raw material costs and labour shortages while the re-rating catalysts are a faster rollout of MRT 3 and more data centre projects.
