Sunway Construction Group Bhd (Suncon) recent key highlights was its vertically integrated nature giving it an edge over the competition for DC projects.
CGS International’s Company Flash Note today (Mac 4) said a meeting with Suncon’s MD Liew Kok Wing and CFO Elaine Lai left the research house feeling more positive on its new order wins prospects.
The key takeaway was its MD highlighting Suncon’s vertically integrated nature where besides a strong construction arm, it also owns a piling, mechanical, engineering and plumbing (MEP) and precast division giving it an edge when bidding for contracts including data centres (DC). This is consistent with their view that Suncon is shaping up to be the go-to contractor for data centres in Johor where it is working on two existing projects.
Suncon reiterated its FY24F new order win target of RM2.5bn-3bn (FY23 RM2.5bn). While this excludes the US$2.4bn Song Hau 2 Power Plant Vietnam project where its 55% stake is worth c.RM6bn), CGS International thinks this is too conservative. 2M24 wins stood at RM831m, including the recent RM720m win to build Sunway Ipoh Mall from Sunway.
CGS International’s FY24F new order win forecast is RM3.9bn (including precast) and every RM500m increase will raise our FY24F EPS and TP by 3%. Suncon’s guidance tends to be more prudent in nature which is evident in its FY23 results, which beat their and Bloomberg’s consensus forecasts by 21%.
Key highlights
Suncon’s total tender book of RM26bn as at Feb 2024 comprises RM13bn for MRT 3, RM6bn for Vietnam power plant, and RM5.5bn for DC, semiconductor factories an warehouses. For DC projects, there are two early contractor involvement (ECI) projects of RM3.4m, for two different clients won in Jan 2024.
This relates to initial design works for potential data centre clients and will likely convert into full construction works eventually.
On its RM1.7bn DC project in Sedenak, the majority of the core building has been completed and recognised. Out of the RM1.5bn outstanding work not recognised, the majority are for MEP works that are dependent on the client Yondr’s end-user demand/requirements.
CGS International expect recognition of billings to pick up in FY24F given that the Tenaga sub-station at the DC is ready and one core building is completed, making it an attractive proposition to the end user. The longer term plans for Yondr is to build a 200MW hyperscale campus on 72.8 acres in Sedenak Tech Park which gives Suncon an added edge for future construction works.
CGS International gathers that there is some confidence for an award of its Vietnam project (Suncon’s 55% stake is worth RM6bn) by mid-CY24F. Suncon has already identified boiler, generator and turbine suppliers and its India country director has moved to Vietnam. Its India Hybrid Annuity Model project, Meensurutti-Chidambaran, will be completed in 1Q24 and Suncon is in talks with 4 infrastructure funds for a potential divestment.
Once this happens, CGS International expects its net gearing of 0.5x (as at 31 Dec 2023) to fall.
Reiterate Add and TP of RM3.44
CGS International reiterates their Add rating along with their SOP-based TP of RM3.44, equivalent to 19.6x FY25F P/E (0.5 s.d. above mean since 2015). CGS International likes Suncon for its strong execution track record, 3-year EPS CAGR of 15% over FY23-FY26F, and market-leading ROEs of 21-24% for FY24-FY26F.
Key downside risks include increased raw material costs and labour shortages. Re-rating catalysts are the award of Vietnam project and more data centre projects.
