PETALING JAYA: Sunway Construction Group Bhd’s (SunCon) business and earnings are set to be driven by the construction of data centres and power plants as well as supply of precast products as its core infrastructure business falls in order book value.
RHB Research expects SunCon to win about RM2.5bil in new jobs yearly for financial year 2023 (FY23) and FY24 to supplement its outstanding order book estimated at RM5.5bil to RM6bil by end 2022.
The company secured a RM1.7bil job in December 2022 for the construction of a data centre in Johor, which translates into an order book-to-revenue cover ratio of 3.2 to 3.5 times.
“We view the data centre job in Johor to be an impetus for earnings growth amid better pre-tax margins of about 8% and larger earnings recognition spread over a shorter period of 21 months compared to its normal construction jobs of RM200 to RM300mil that are billed over two to four years on average,” the research house said in a report yesterday.
It added the construction group has tendered for RM10bil worth of new jobs including more data centre jobs as well as projects such as the Johor Baru–Singapore Rapid Transit System Link project.
Hong Leong Investment Bank (HLIB) Research, meanwhile, expects SunCon to win at least RM2bil worth of jobs this year with a bullish case target of RM8bil.
The order book replenishment could be achieved through projects such as the Mass Rapid Transit 3 (MRT3) (works worth RM1bil to RM1.2bil), the CP2 project in Bandar Sunway (RM300mil), an Ipoh mall (RM200mil) and precast jobs worth some RM300mil.
“We believe SunCon’s upside scenario incorporated the RM5.8bil Vietnam power plant project but no Tier-1 MRT 3 packages. We believe developments in the first half of 2023 (1H23) would be critical as to where SunCon’s replenishment pathway will look like in FY23,” HLIB Research noted in a report following a meeting with the company’s management recently.
HLIB Research believes the power plant’s financial close could be difficult to secure as funders like China, Japan and South Korea have pledged to cease financing of new coal-fired plants.
RHB Research added SunCon’s move into the data centre and power plant development space will bring diversity to its orderbook and help mitigate the risks of slow job replenishments from public infrastructure projects such as the MRT3 project that may be subject to cost review by the federal government.
“For context, 8% of SunCon’s outstanding order book came from infrastructure and piling jobs as at end-September 2022 versus over 40% as at end-December 2018,” RHB Research clarified.
The research outfit also expects SunCon’s precast segment to benefit from Singapore’s Housing and Development Board’s plans to launch some 23,000 flats this year. Over 90% of SunCon’s precast revenue is derived from projects in the island republic.
A positive note is the group’s manpower needs appear to have improved, with some 390 foreign workers joining the group in November and another 300 expected to join in the first quarter (1Q23) or 1H23, HLIB Research stated.
This should help with project execution and ease wage rate pressures in the market.
RHB Research expects SunCon to post a 4Q22 core net profit rise of 30%-50% quarter-on-quarter to RM35mil to RM40mil due to the improved labour supply and operating conditions.
“This would translate to a FY22 earnings growth of above 20%,” it stated.
The research outfit has maintained its “buy” call on the company with a target price (TP) of RM2.07 a share.
HLIB Research also has a “buy” on SunCon but at a lower TP of RM1.94, adding that the company presents a safer exposure to future infrastructure project rollouts, backed by strong support from its parent company.
It also warned SunCon could slip into net gearing position due to cash flow mismatch for its two Indian highway projects.