SUNCON has bagged a RM253m contract to refurbish Sunway Carnival Mall in Penang, boosting its YTD job wins to RM1.5b, on track to meet our FY23F assumption of RM2.2b. We maintain our forecasts, TP of RM2.13 and OUTPERFORM call.

SUNCON has been awarded a refurbishment contract worth RM253m for Sunway Carnival Mall. Awarded by SUNREIT (OP; TP: RM1.93), it comprises a 4-storey shopping complex and a 1-storey cultural/commercial centre with 1-storey basement in Seberang Jaya, Penang. Spanning a construction period of 24 months, the project is scheduled for completion by Jun 2025.

We are positive on this latest contract that boosted SUNCON’s YTD job wins to RM1.5b, on track to meet our FY23F assumption of RM2.2b (and the company’s own more conservative target of RM2b), and lifted its outstanding orderbook by 2% to RM12.3b. The guided EBIT margin of 5%-8% is also in line with our assumption of 7.5%.

Forecasts: Maintained.

We also keep our TP of RM2.13 based on 16x FY23F PER, at the upper end of the forward PER range of 9x to 18x we ascribed to the construction sector to reflect SUNCON’s relatively huge market capitalisation. Our TP also includes a 5% premium to reflect a 4-star ESG rating as appraised by us (see Page 4).

Outlook. We expect a significant revitalisation of the construction sector in 2HCY23 backed by: (i) the roll-out of the RM45b MRT3 project and six flood mitigation projects reportedly to be worth RM13b, and (ii) an accelerated disbursement of the massive RM97b gross development expenditure budgeted under Budget 2023 (+35% YoY over RM71.6b a year ago). Similarly, the private sector construction market is vibrant underpinned by massive investment in new semiconductor foundries and data centres.

SUNCON is eyeing opportunities in data centre building jobs, MRT3 work packages and contracts from parent and sister companies.

We like SUNCON for: (i) strong job prospects of the sector as a whole with the imminent roll-out of key public infrastructure projects; (ii) its strong earnings visibility underpinned by RM12.3b outstanding order book and recurring jobs from parent and sister companies, and (iii) its extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works. Maintain OUTPERFORM.

Risks to our recommendation 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 - 4 Jul 2023