Sunway Construction Group Bhd Potent combination of earnings upgrades and P/E re-rating:

 ■ Reiterate Add, as we raise FY24F-FY26F EPS and lift TP to RM5.46.

 ■ We think our FY24F new order wins of RM5.2bn, at the top end of RM4bn5bn guidance, is achievable with upsizing of existing data centre projects.

■ Re-rating thus far driven by EPS upgrades, with valuation re-rating to follow.

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Focus on data centre and government infra projects:

In our view, the cancellation of Song Hau 2 thermal plant project is a setback but Suncon can now focus its resources on project flows locally particularly for data centre projects and the eventual revival of government infrastructure. Suncon has 5 data centre projects (from 4 clients) contributing 50% of its orderbook of RM7.9bn as at Jun-24. Management said it is also bidding for 4 data centre projects, most of which are in Johor.

Upsizing of existing data centre projects brings upside potential:

Suncon is witnessing upsizing of its existing data centre projects; in Jun 24, its existing RM1.7bn Sedenak data centre contract (Sedenak) was increased to RM3.2bn due to additional scope of work. We do not discount further upsizing of this contract depending on end demand. The remaining data centre projects in its orderbook are K2 (RM197m), early contractor involvement for a US MNC (RM58m) and another US MNC (RM748m). We think the potential upsizing of these may add another RM2bn-3bn of new orders in 2H24F and some may spillover into 1Q25F. 6M24 wins amounted to RM3.3bn (Fig 5) vs. our FY24F new win target of RM5.2bn (including precast) and its revised target of RM4bn5bn (from RM2.5bn-3bn). Hence, this implies incremental new wins of RM1.9bn which we believe is achievable not withstanding potential new wins from government infrastructure projects (Penang LRT and airport expansion and Johor ART) and new data centres.

Reiterate Add; we raise FY24F-FY26F EPS and TP:

We raise our FY24F/FY25F/FY26F EPS by 6%/23%/8% as we adjust the revenue recognition of some key projects, such as Sedenak which is a fast-track project to be completed by 1Q26F. We lift our SOP-derived TP to RM5.46 as we lift our forecasts and assign a higher target P/E of 22x for construction (parity with Gamuda), which we think is justified in spite of its smaller orderbook given superior ROEs and more concentrated data centre exposure. We also highlight in Fig 3 that the re-rating for Suncon over the past 1 year has largely been driven by EPS upgrades, lending weight that a valuation re-rating is justified. We like Suncon for its strong execution track record and first-mover advantage in the data centre space, 3-year EPS CAGR of 23% over FY23-FY26F, and market-leading ROEs of 23-30% for FY24-FY26F.

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