KEY INVESTMENT HIGHLIGHTS

• Minimal impact of the AI chip ban on DC operations; clients remain confident, with no delays or slowdowns expected
• Targeted order book replenishment target maintained at RM4-5b for FY25, supported by diversified projects.
• Actively bidding for jobs; tender book at RM10b
• Upgrade to BUY with an unchanged TP of RM4.46

Business as usual. Our meeting with Sunway Construction (SunCon) yesterday reaffirms our belief that the recent sell down of data centre- related construction stocks may have been overdone. Management, which have been in close communication with its clients, said none have expressed any adverse feedback on the restrictions on exports of artificial intelligence (AI) chips. In fact, its clients remain confident and do not expect any delays in their plans. However, management noted that much of the current discourse on the AI chip restrictions is speculative and clearer guidelines from the US government are necessary to fully assess potential long-term implications, especially with the new administration under President Donald Trump.

Data Centre project updates. SunCon's current order book reflects a strong focus on data centre projects, with circa 70% of its 2024 order book replenishment related to this segment. The JHB1X0 data centre that it is constructing at the Sedenak Tech Park is over 30% complete as of Dec-24, with substantial completion targeted for FY25 and minor spillovers into FY26. The total contract size for that project is RM3.65b, including additional works and variation orders (VOs). Management added that there is no slowdown in demand for data centre projects in the Klang Valley and Johor and no indications of such plans being delayed or scrapped due to the Framework of AI Diffusion by the US. SunCon's tender book stands at RM10b currently, comprising various projects such as data centres, external building jobs, warehouses, factories, and precast works.

RM4-5b of replenishment for FY25. Management has set its order book replenishment at RM4b to RM5b this year. Despite its current focus on data centre projects, this does not signify a shift away from infrastructure and property projects remains actively involved in infrastructure tenders. While it has taken on fewer property development projects currently, in a situation of a worse-case scenario surrounding data centre projects, it has the flexibility to revert to undertake more jobs within the Sunway Group. Management has also indicated its interest in bidding for the second package of the Penang LRT, likely via a JV, which will be an above-sea alignment from Komtar to Penang Sentral. The tender for the package is expected to be opened in Jul-25.

Operational and financial resilience. SunCon's existing projects are fully protected by binding contracts. From the start of data centre projects, critical elements such as chillers and equipment are pre-ordered, resulting in significant sunk costs.

This ensures that SunCon is compensated for completed work and materials, as cancellations are not permitted. The supply chain, largely consisting of purpose-built suppliers, is contractually secured, and clients are involved in fabrication processes, further reinforcing revenue protection. Management also acknowledged increasing competition in the data centre market, leading to margin compression. Current margins remain within the 6-8% range, but SunCon will not compromise quality by reducing prices below this threshold. Selective bidding ensures projects are large-scale, with clients who value quality over cost, mitigating the impact of price competition.

Earnings estimates. We maintain our earnings estimates due the minimal impact of the AI chip ban on its operations, as data centers do not rely directly on these chips for construction. Clients remain committed to expansion plans, and the group's ability to adapt by designing high-spec infrastructure for both AI and cloud servers ensures continued demand.

Target price. We are also maintaining our TP for SunCon at RM4.46, pegging its FY25F EPS of 18.6 sen to a PER of 24x, which is +1SD above its five-year mean.

Upgrade to BUY. SunCon continues to demonstrate resilience and adaptability, supported by a well-diversified project portfolio and strong confidence from its data centre clients. SunCon's expertise in data center construction positions it to capitalise on sustained demand, with significant contributions from ongoing projects and a robust RM10 billion tender pipelines. We believe the recent sell down in construction stocks recently, including SunCon, presents a good opportunity to pick up the counter hence, warranting the upgrading of our stance to BUY from NEUTRAL previously.

Source: MIDF Research - 22 Jan 2025