A year of optimism for Sunway Construction

PETALING JAYA: Sunway Construction Group Bhd (SunCon) is beaming with optimism for a better year in 2024, as it adopts a higher-than-usual replenishment target of RM2.5bil to RM3bil, says Hong Leong Investment Bank Research (HLIB Research).

The research house also expects multiple upside risks to the group’s management target, given the vibrant data centre and industrial markets, potential formalisation of its Vietnam project and mega rail rollout.

HLIB Research in a recent report said: “SunCon is a proxy to upcoming infrastructure project rollouts, growing data centre market and a growing parent-co empire.”

Following a recent meeting with SunCon management, HLIB Research said: “We continue to expect a sequentially stronger quarter to wrap up the financial year 2023 (FY23), driven by billings from completing projects.

“Going into FY24, should things fall into place as anticipated, SunCon could report a revenue of about RM3bil with profitability margins similar to FY23.”

It noted that in FY24, SunCon is adopting a base-case target of RM2.5bil to RM3bil, higher than its typical RM2bil target.

“We reckon this is partially lifted by outstanding tenders where awards could spillover into FY24.

“We believe these are several tenders where the procurement process was initiated late last year,” HLIB Research added.

In addition, making up its RM2.5bil-RM3bil target are RM1bil internal projects, with the remaining RM1.5bil to RM2bil from external projects such as data centres, precast, warehouses and factories.

Meanwhile, HLIB Research expects to see some contracts flowing in by the first quarter of 2024 (1Q24).

“We see multiple upside risks to management’s conservative target.

“This is given that projects such as Free Commercial Zone in Iskandar Puteri (Phase 1 to be completed by 2025) in Johor, mixed development Cochrane project, Mass Rapid Transit 3 (CMC301 and 302) worth RM13bil and Song Hau 2 power plant in Vietnam worth RM6.3bil was not included,” it noted.

With the potential rollout of Penang Light Rail Transit in 2024, the research house said SunCon could also participate in the work packages.

On the group’s data centres, HLIB Research said SunCon’s maiden data centre project (JHB1X0) could see sluggish contribution in 1Q24, as contract progress transitions to “notice to proceed 2”, which would require finalised specs from end users.

“The progress of this project remains the biggest swing factor to our FY24 earnings estimates,” added the research house.

The group’s Song Hau 2 power plant project in Vietnam is on track to be activated by mid-2024, said HLIB Research, adding: “We are encouraged by the financing progress albeit at a gradual pace.”

Recall that some scope of works amounting to US$9.5mil were previously amended to allow for early execution.

On the group’s exposure in Johor, SunCon has seen growing contributions from Johor-based projects, driven by data centre contracts and Johor Baru-Singapore rapid transit system, collectively constituting about 40% of unbilled order book.

In Sarawak, HLIB Research gathered that SunCon’s penetration into the Borneo states will be undertaken in collaboration with its parent-co, Sunway Bhd, in two MoUs to undertake the redevelopment of land in Kuching and Sibu, which would translate into future construction presence in the state.

“While the company will still shy away from infrastructure projects in the state, it is receptive to renewable energy opportunities in addition to the above,” it noted.

After factoring in recognition spillover from certain projects, HLIB Research has tweaked its forecasts on SunCon for FY23, FY24 and FY25 by -1.1%, -7.3% and +5.4%, respectively.

It maintained a “buy” call on the stock with a higher target price of RM2.95.