SUNCON and its JV partner have entered into an interim agreement with TOYOVEN to provide EPC works for a Vietnamese coal-fired power plant worth USD2.2b (RM10b). We are positive over this contract which brings YTD replenishment to RM6.9b, beating our RM1.5b replenishment assumption and lifting its outstanding order book to an all-time high of RM10b. After factoring in the new win, we raise FY23F earnings by 19% with a higher SoP-TP of RM1.93 (from RM1.60). Reiterate OP.

Vietnamese power plant contract. Through a 60:40 JV, SUNCON and Power Engineering Consulting Joint Stock Company 2 (PECC2) have entered into an interim agreement with TOYOVEN to provide engineering, procurement and construction (EPC) works worth USD2.2b (or RM10b) for a 2,120 MW coal-fired power plant known as Song Hau 2 Thermal Power Plant located in Vietnam (SUNCON’s effective share in the contract is RM6b). The contract will span over 57 months upon finalising terms in a definitive agreement within the next 6 months.

We understand from SUNCON that this project would be a pure EPC job with no required financing from its end, and the commencement of the contract hinges upon the project owners obtaining financial close from its syndicated lenders. To recap, TOYOVEN has secured this power plant concession in end- 2020 but has yet to achieve financial close. We believe that SUNCON’s role as an established contractor in the concession would help expedite the financial close.

Overall, the new lumpy contract lifts YTD replenishment to RM6.9b – surpassing our and the company’s RM1.5b and RM2.0b replenishment target by a mile. We are positive over the sheer scale of the project which lifts SUNCON’s current outstanding order book of RM4.0b to a record high of RM10b (previous peak was RM6.6b in 2017).

Assumptions and forecasts. Maintain FY22F earnings but raise FY23F earnings by 19% after factoring in the higher FY22F replenishment of RM6.9b.

Maintain OUTPERFORM with higher SoP-TP of RM1.93 (from RM1.60) based on unchanged 16x PER for its construction segment. We like SUNCON for: (i) its strong replenishment pipeline from parent SUNWAY, (ii) its dominant position in the local construction space with extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works, and (iii) its strong balance sheet that allows it to participate in deferred payment model projects. We accord a 5% premium to its TP given a 4- star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) sustained weak flows of construction jobs from public and private sectors, (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iii) rising cost of building materials.

Source: Kenanga Research - 29 Dec 2022