Data centre developer Yellowwood Properties Sdn Bhd (Yellowwood) has awarded SUNCON the NTP 4 works of its data centre project JHB1x0, raising the total contract value by RM1.5b to RM3.2b. We raise our FY24-25F net profit forecasts by 10% and 22%, respectively, lift our TP by 22% to RM3.85 (from RM3.16) and upgrade our call to OUTPERFORM from MARKET PERFORM.

Yellowwood has awarded SUNCON the NTP 4 works of its data centre project JHB1x0, in addition to those of NTP 1 (completed), NTP 2 and NTP 3, awarded since Dec 2022. This has boosted the total contract value of SUNCON’s JHB1x0 job by RM1.5b to RM3.2b (from RM1.7b). The entire JHB1x0 project will now be completed by Feb 2026.

This additional work scope for the JHB1x0 project has increased SUNCON’s YTD job wins to RM3.3b (on track to beat our full-year job win assumption of RM3.5b) and its outstanding order book to RM7.9b. Typically, data centre building jobs can fetch an EBIT margin that is at the higher end of the range of 5% to 8% for building jobs. We assume an EBIT margin of 7.5% for the additional works.

Outlook. We expect a significant revitalisation of the construction sector in 2024 backed by: (i) the roll-out of the RM45b MRT3 project, Pan Borneo Highway Phase 2 and several 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 Penang LRT Mutiara Line work packages, and contracts from parent and sister companies.

Forecasts. We raise our FY24-25F net profit forecasts by 10% and 22%, respectively, as we lift our FY24-25F job win assumptions to RM4.5b and RM4b, respectively, (both from RM3.5b).

Valuations. Correspondingly, we lift our TP by 22% to RM3.85 (from RM3.16) based on an unchanged 18x FY25F PER, which is in-line with our valuation for big cap construction companies, i.e. GAMUDA (OP; TP: RM6.70) and IJM (OP; TP: RM2.77). 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 RM6.9b 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. Upgrade the stock to OUTPERFORM from MARKET PERFORM as value has emerged on higher job win assumptions.

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 - 11 Jun 2024