SUNCON has secured a RM721m contract from its parent to build a 6-storey shopping complex in Perak. This is its first key contract win in FY24 (against our full-year assumption of RM3b), lifting its outstanding order book to a whopping RM6.16b. We maintain our forecasts, TP of RM3.00 and OUTPERFORM call.

SUNCON has been awarded a RM721m contract by parent SUNWAY (UP; TP: RM2.42) to build a 6-storey shopping mall in Perak. The project period is from Mar 2024 to Jan 2027.

We are positive on its first major contract win in FY24, bringing its YTD job wins to RM831m, against our assumption of RM3.0b for the full year which is in-line with the company’s guidance. The latest contract has lifted its outstanding orderbook by 15% to RM6.16b. The guided EBIT margin of 5%-8% is also in line with our assumption of 7.5%.

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) a vibrant private sector construction market, backed 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.

Forecasts: Maintained.

Valuations. We maintain our TP of RM3.00 based on 18x FY25F PER, which is in-line with our valuation for big cap construction companies, i.e. GAMUDA (OP; TP: RM5.45) and IJM (OP; TP: RM2.31). Our TP also includes a 5% premium to reflect a 4-star ESG rating as appraised by us (see Page 4).

Investment case. 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 RM6.05b 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 - 22 Feb 2024