SUNCON has bagged two building jobs - a Daiso warehouse in Pulau Indah and a data centre in Johor effectively worth a total of RM487.6m. This brings its YTD job wins to RM2.2b, which has already met our FY23F full-year assumption. We maintain our forecasts, TP of RM2.39 and OUTPERFORM call.

SUNCON has clinched two building contracts effectively worth a total of RM487.6m as follows:

i. a RM595.4m building job for Daiso’s global distribution centre warehouse in Pulau Indah Port Klang, from Daiso Malaysia Group Sdn Bhd, via a 50:50 JV with Kajima (Malaysia) Sdn Bhd, with completion in 2QFY26.

ii. RM190m contract from K2 Strategic Infrastructure Malaysia Sdn Bhd (a Kuok Group company) to build a data centre in Johor with completion in 4QFY24.

We are positive on these two contracts that boosted SUNCON’s YTD job wins to RM2.2b, which has already met our FY23F full-year assumption of RM2.2b and exceeded the company’s own more conservative target of RM2b. They have also lifted its current outstanding order book by 8% to RM6.38b. The guided EBIT margin of 5%-8% is also in line with our assumption of 7.5%.

Forecasts: Maintained.

We keep our TP of RM2.39 based on 18x FY24F PER, which is in-line with our valuation for big cap construction companies, i.e., GAMUDA (OP; TP: RM5.45) and IJM (OP; TP: RM2.15). 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 2024 backed by: (i) the roll-out of the RM45b MRT3 project, RM9.5b Bayan Lepas LRT and six flood mitigation projects reportedly to be worth RM13b, and (ii) the vibrant private sector construction market, underpinned by massive investment in new semiconductor foundries and data centres. SUNCON is eyeing opportunities in data centre building jobs, MRT3 and Bayan Lepas LRT 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 RM6.38b 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) 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 - 6 Oct 2023