HLBank Research Highlights

Sunway Construction Group - Last-gasp Winner

HLInvest
Publish date: Wed, 04 Jan 2023, 06:54 PM
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This blog publishes research reports from Hong Leong Investment Bank

SunCon entered into a RM1.7bn data centre contract with Yellowwood. This win takes FY22 contract wins to RM2.6bn, surpassing our and consensus expectations as well as management’s guidance. Accounting for this, orderbook increases by 42% to RM5.7bn. Recognition ramp-up should be quick with a short construction period. We believe SunCon will be in prime position to secure additional work should there be expansion plans. Going forward, SunCon could secure a bumper RM5.8bn contract for the Vietnam power plant if things go smoothly. Increase FY23 & 24 core PATAMI forecasts by 14.2% and 30.3% respectively. Maintain BUY with higher TP of RM2.06. SunCon presents a safer exposure to future infrastructure project rollouts due to its lower reliance on public infra spending. Risks: MRT3 cancellation, political uncertainty, elevated materials prices and labour shortage.

NEWSBREAK

On 31-Dec 2022, SunCon entered into a contract with Yellowwood Properties Sdn Bhd carrying an approximate contract value of RM1.7bn. The contract is for the design, development, construction and completion of a data centre located in Sedenak Tech Park (STeP) in Johor. Works have commenced on 31-Dec-2022 and will span ~21 months finishing in 3QCY24.

HLIB’S VIEW

Beats forecasts. The latest contract takes total wins for FY22 to RM2.6bn surpassing our forecasts (RM900m) and management’s guidance (RM2bn). Accounting for this, orderbook increases by 42% to RM5.7bn; translates to 3.3x cover on FY21 revenue. We expect project EBIT margin in the range of 5-8%. Earnings recognition will be supercharged with a short construction period relative to the contract value. We believe SunCon will be in prime position to secure additional work should Yellowwood explore expansion opportunities for the said project.

More to look forward to. Management is expecting to ink the final Engineering, Procurement and Construction (EPC) agreement with Toyo Ink worth RM5.8bn (based on 60% stake) by 3QCY23 while the financial close could come in 1QCY23. This would result in a doubling of unbilled orderbook to a record high of >RM10bn (factoring in burn). Nevertheless, we have left the project unaccounted for in our forecasts pending financial close. We gather that EXIM Bank of Malaysia had offered their services as lead arranger and bookrunner for the project’s syndicated financing facilities in mid-Nov 2022.

Forecast. We increase FY23 & 24 core PATAMI forecasts by 14.2% and 30.3% respectively, post-incorporating the latest contract win.

Maintain BUY, TP: RM2.06. Maintain BUY with higher TP of RM2.06 (from RM1.83) post-earnings adjustments. TP is derived by pegging FY23 EPS to 15x (unchanged) ex-cash P/E multiple. SunCon presents a safer exposure to future infrastructure project rollouts, backed by strong support from parent-co. Nevertheless, our call is premised on no disruptive infrastructure policies from the new government. Risks: MRT3 cancellation, political uncertainty, elevated materials prices and labour shortage.

 

Source: Hong Leong Investment Bank Research - 4 Jan 2023

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