PETALING JAYA: Sunway Construction Bhd (SunCon) is seeing a strong return as investors expect it to win jobs of several infrastructure projects slated to be rolled out.
Year-to-date, the stock is up 46.2% to close at RM2.91 last Friday, surpassing the Bursa Malaysia Construction Index’s 15.2% rise over the same period.
At this level, it is trading at a price-earnings of 26.3 times. One analyst said this valuation is “justified” given the group’s higher return on equity versus peers in the sector.
He said SunCon has been able to clinch a mix of external and internal from its parent Sunway Bhd
’s projects, which will provide decent earnings visibility for the next two to three years. Additionally, its diversification into the data centre space is gaining traction.
Last week, SunCon bagged a RM747.8mil contract from a US-based multinational technology corporation for the construction and completion of a data centre located in Cyberjaya, Selangor.
This is the group’s third data centre contract win, after the RM1.7bil Sedenak data centre and RM289mil K2 data centre in Johor.
This brings jobs secured since the start of the year to RM1.6bil or 53% of RHB Research’s job replenishment target of RM3bil for the financial year 2024 (FY24). In total, SunCon’s total order book now stands at RM6.9bil.
According to RHB Research, SunCon has clinched around RM2.7bil worth of data centre-related contracts and based on its estimates, they make up about 31% of the group’s total outstanding order book.
Meanwhile, CGSI Research estimates that SunCon’s pre-tax margin for this project could be at the higher end of its 5% to 8% guidance.
With such strong wins, the research firm thinks that “SunCon’s forecast FY24 new order win target of RM2.5bil-RM3bil is looking too conservative”.
“This figure excludes the potential award of the US$2.4bil Song Hau 2 Power Plant Vietnam project where its 55% stake would be worth around RM6bil.
“Our FY24 new order win forecast is RM3.9bil (including precast contracts) and every RM500mil increase will raise our forecast FY24 earnings per share and fair valuation of the company by 3%,” added CGSI Research’, which has a target price of RM3.44 for the stock.
It does not discount more contract wins in the thriving data centre and semiconductor fields.
As for tender book, it stood at RM26bil and comprises the mass rapid transit three (MRT3), Song Hau coal-fired power plant, as well as other smaller jobs for pre-cast concrete, data centres and industrial plants. This is besides the internal contract flows from parent company Sunway Bhd.
According to the research firm, a re-rating catalyst for the stock could come from the two memoranda of understanding Sunway had inked with Sarawak-based entities late last year to transform prime land covering a total of 608 acres in Kuching.
Where infrastructure projects are concerned, SunCon is one of the strong contenders for mega-projects, namely, the MRT3 and Penang LRT.
However, analysts expect the escalating cost of cement materials to weigh on the group’s margin. SunCon posted a record high core earnings of RM169.8mil for FY23, but its core net margin saw a decline to 6.4% due to the cost of cement, which increased by more than 20% in 2023.
With a healthy pipeline of projects, most research firms have a “buy” call on the stock and see further price upside – RM3.59 was among the more bullish one based on a quick look at reports released last Friday.
A contrarian was MIDF Research, which has downgraded the stock to “neutral”. The firm kept its target price unchanged at RM2.86.
However, it said the strong run-up in the stock’s share price year-to-date fairly values the group’s prospects for now.
