SUNCON has accepted an additional variation order (VO) of RM265m from the Yondr data centre in Sedenak Tech Park, Johor.

This has increased the total contract value for this data centre project to RM3.5b and also raised its YTD contract win to RM3.9b and current outstanding order book to RM7.8b. We learnt that there are four more data centre jobs in the pipeline. We keep our estimates, MP rating and TP of RM4.71 unchanged RM265m VO added for Yondr data centre. On Wednesday, SUNCON announced that it has accepted a VO worth RM265m as additional tenant improvement works from Yellowwood Properties Sdn Bhd for the latter's JHB1X0 data centre project in Sedenak Tech Park. This boosted the total contract value of SUNCON's JHB1X0 to RM3.5b from RM3.2b. To cap, SUNCON was awarded a RM1.7b contract to build JHB1X0 in Dec 2022. Subsequently, an additional NTP4 work worths RM1.5b was awarded in June this year, followed by an RM82m VO in Sept, before this RM265m VO. The scheduled completion for this data centre project remains unchanged - by Feb 2026.

Further data centres in the pipeline. We view this announcement positively as it increased SUNCON's YTD job wins to RM3.9b, close to management's target of RM4b-RM5b and our assumption of RM4.5b in FY24. We understand that SUNCON has tendered for four data centre projects currently with a potential additional VO from its K2 data centre project. 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. Its outstanding order book stands at RM7.8b currently.

Forecasts. Maintained with unchanged job win assumption of RM4.5b and RM4.0b for FY24F and FY25F, respectively.

Valuations. We maintain our TP of RM4.71, based on 22x FY25F PER, which is in-line with our valuation for big cap construction companies, i.e. GAMUDA (OP; TP: RM9.20) and IJM (MP; TP: RM3.16). 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 roll-out of key public infrastructure projects, (ii) its strong earnings visibility underpinned by RM7.8b 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. MARKET PERFORM reaffirmed.

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 - 1 Nov 2024