• SUNCON reported core net earnings of RM69.5mn for 1HFY24, accounting for 35.6% and 38.4% of our and consensus full-year estimates, respectively. We deem these results to be in line with expectations, as we anticipate stronger earnings momentum in 2H due to accelerated revenue recognition from recent construction projects.

• YoY, 1HFY24 revenue and PBT grew by 11.5% and 15.1% to RM1.3bn and RM91.9mn, respectively, driven by higher progress billing from new construction projects. However, this improvement was partly offset by a decline in the precast division, which had benefitted from higher contributions from tail-end projects in the previous financial year.

• Similarly, SUNCON's 2QFY24 revenue increased by 7.7% QoQ, mainly driven by higher turnover in the construction division. Although there was a lower contribution from the precast division due to planned production for newly secured projects that will only commence in 4Q24 and 1Q25, this was more than offset by strong performance in the construction division and higher interest income from deferred financing extended to existing clients. As a result, PBT saw a sharper increase of 20.5%.

• A first interim dividend of 3.5sen/share was declared (2QFY23: 3.0sen/share).

• YTD, SUNCON secured RM3.5bn in new contracts and is on track to meet its new order replenishment target of RM4.0bn to RM5.0bn for the year.

Impact

• No change to our FY24-26F earnings forecasts.

Outlook

• We remain positive on SUNCON's outlook, supported by strong earnings visibility from its current outstanding order book of RM7.4bn as of end-June, equivalent to 2.8x FY23 revenue. Potential growth is likely to be driven by an increase in data centre jobs, which typically offer higher project values with shorter lead times due to the urgent demand for data centres and other advanced technology projects (ATP) by IT giants.

• Additionally, SUNCON has realigned its focus and resources toward the ATP industry, with a robust tender book valued at RM13.7bn, all of which are ATP-related. This positions SUNCON well to capitalise on opportunities to strengthen its presence in the ATP space, leveraging its vertically integrated expertise as a construction player.

• Following the announcement by US-based multinational Amazon AWS to invest approximately USD6.9bn in Malaysia through 2038 to build three Availability Zones (AZ) with independent power, cooling, and physical security, we believe SUNCON stands to be a frontrunner for these new projects, given its solid track record in data centre construction. Assuming each AZ includes a 50MW facility and the construction cost is estimated at USD6mn-10mn per MW, these three AZs could contribute a gross construction value totalling approximately USD900mn-1.5bn, translating to c.RM4.0bn-6.6bn.

Valuation

• We maintain our Buy call on the stock with an unchanged TP of RM6.15, premise on 26x CY25 EPS and 3% ESG premium given our 4-star rating. We continue to like SUNCON due to:- (i) SUNCON’s strong position as a contender for mega infrastructure projects, namely MRT3, Johor ART and Penang LRT, (ii) strong earnings visibility on the back of a robust outstanding order book, and (iii) its leading position in securing more jobs in the thriving ATP industry.

Source: TA Research - 23 Aug 2024