Date: September 23, 2024
Broker: CGS International Securities
Company Overview
Sunway Construction Group Bhd (Suncon) is a prominent construction company in Malaysia, renowned for its specialization in data center (DC) projects. The company is focused on sustainable growth, leveraging its first-mover advantage in the DC construction space, particularly in Johor. Suncon’s total order book as of June 2024 stands at RM7.4 billion, with 51% of the projects related to DCs.
Key Projects and Pipeline
As of 1H24, Suncon had secured RM3.5 billion in new wins. The company is expected to achieve the upper end of its RM4 billion to RM5 billion target for FY24, largely driven by DC project upsizing. The company’s biggest project, the RM3.2 billion Sedenak DC, may undergo further upsizing, depending on demand. Additionally, Suncon has four tenders from new clients in Johor and expects to win more contracts by the end of the year.
Dominance in Johor’s Data Center Market
Suncon has established itself as a leader in DC projects in Johor, thanks to its strategic partnership with Engie Malaysia, which provides expertise in mechanical, electrical, and plumbing (MEP) systems. Johor’s IT capacity is forecasted to grow significantly, with a potential value of RM18 billion from committed projects alone. Suncon’s early entry into the market gives it a competitive edge as it continues to capitalize on this growth.
Diversification Strategy
Beyond DC projects, Suncon is diversifying into semiconductor factories and government infrastructure projects, which is seen as a rerating catalyst for the company. The company is also expanding its footprint in renewable energy projects, having already won two large-scale solar (LSS) projects in FY21 and FY22. Furthermore, Suncon is an engineering, procurement, construction, and commissioning (EPCC) contractor for these renewable energy projects.
Financial Performance and Valuation
For FY24-26, Suncon’s revenue is expected to grow, fueled by strong demand for DC construction. The company’s EBITDA for FY24F is projected at RM304 million, increasing to RM498 million in FY25F. Net profit for FY25F is expected to reach RM322.6 million, a significant increase from RM190.9 million in FY24F.
Suncon’s share price has experienced a re-rating, largely driven by earnings per share (EPS) upgrades. Its EPS is forecasted to grow by 69% in FY25F. The company’s strong execution track record and concentrated DC exposure with high margins are contributing factors to its superior returns. Suncon’s price-to-earnings (P/E) ratio is forecasted at 30.14x for FY24F and 17.84x for FY25F.
Target Price and Consensus Ratings
CGS International Securities has reiterated its “Add” rating for Suncon and raised its target price (TP) from RM5.46 to RM6.00. The TP is derived using the Gordon Growth Model (GGM), reflecting Suncon’s strong ROE of 32%. Consensus ratings from Bloomberg show a mixed view on the stock, with 7 buy ratings, 6 hold ratings, and 1 sell rating. Suncon’s current price is RM4.45, offering a 34.8% upside to the target price.
ESG Initiatives
Suncon has taken significant steps in Environmental, Social, and Governance (ESG) practices. It was recently awarded a contract for a district cooling system (DCS) in collaboration with Engie South East Asia. The company is also focused on achieving 30% women representation on its board, aligning with its ESG goals.
In the renewable energy space, Suncon was one of 22 winners in the Corporate Green Power Programme (CGPP) announced by the Energy Commission in August 2023. The company is poised to explore opportunities in Malaysia’s voluntary carbon market (VCM) and aims to enhance its ESG profile through sustainable infrastructure projects.
Risks and Catalysts
Suncon faces risks from a potentially more competitive landscape and rising costs. However, re-rating catalysts include the potential for additional government infrastructure projects and more data center wins in Johor. Suncon’s diversified project portfolio, including semiconductor factories and renewable energy, further enhances its growth prospects.
Ownership Structure
The major shareholders of Sunway Construction Group Bhd are Sunway Berhad, holding 54.4%, followed by the Employees Provident Fund (EPF) with 9.4%, and Amanah Saham holding 7.3%.
Conclusion
Suncon is well-positioned for growth in Malaysia’s construction sector, with a particular focus on data centers, renewable energy projects, and ESG initiatives. The company’s ability to secure high-margin contracts and its proactive diversification strategy make it a key player in the Malaysian market.
