• We recently toured the Rapid Transit System Link (RTS Link) in Bukit Chagar, Johor Bahru, where Sunway Construction (SunCon) is actively involved. We were informed that its work scope has reached 30% completion, staying on track to meet the operational deadline set for 2027.

• Overall, we remain optimistic on its earnings outlook due to (i) exposure to data centre projects which could offer double digit margin and shorter project turnaround, (ii) steady flow of internal contracts from Sunway, and (iii) robust orderbook of RM6.9bn.

• Maintain SunCon as a BUY with higher TP of RM3.69 (from RM3.19) based on 5-year average PER of 19.5x pegged to FY25F EPS of 18.9sen.

Bustling Construction Activity in Bukit Chagar

We recently visited the Rapid Transit System Link (RTS Link) in Bukit Chagar, Johor Bahru, where Sunway Construction (SunCon) is currently undertaking the construction of Package 1B Advance Works and Package 5 Terrestrial Viaducts and Ancillary Structures that isworth RM605mn. The project is making good progress and is on course to meet its deadline in which the package set to be delivered by 2QFY25. SunCon's portion has currently achieved approximately 30% progress, with expectations to reach 60% by 4Q2024. Simultaneously, the Transport Minister has reported that the overall RTS Link progress has reached 65-70% completion.

With the vision of making Bukit Chagar the transportation hub in the central district, main roads with elevated flyovers will be directly link to the Bukit Chagar Immigration, Customs, and Quarantine (ICQ) complex. This is to be complimented further with multiple access points from surrounding roads for enhanced accessibility. Pedestrian bridges will also be linked to nearby shopping centers and the Ibrahim International Business District (IIBD). To streamline services, a pedestrian bridge will seamlessly integrate the ICQ complex, RTS Link station, and KTM JB Sentral Station, facilitating smooth coordination among RTS, KTMB, and MyBas Johor Bahru. Additionally, the government is exploring the potential use of the Gemas-Johor Baru Electrified Double-Tracking Rail Project (Gemas-JB EDTP) track to offer direct access to the RTS Link station for residents from other districts in Johor.

Balancing Potential and Feasibility

SunCon has expressed interest in participating in the bid for the Light Rapid Transit (LRT) Johor project, but we think it may only take off after the completion of RTS Link project in 2027. In regards of involvement in the High-Speed Rail (HSR) project, SunCon is less enthusiastic due to the requirement for self-funding, which may pose challenges to the company's balance sheet. However, there is still potential for SunCon to engage as a second-tier contractor. To recap, SunCon’s net gearing stood at 0.56x as at end FY23 (Refer Chart 2), a shift from the previous year's net cash position. The total borrowings are largely attributed to two Hybrid Annuity Model (HAM) projects in India. Under these projects, 60% of receivables will be paid over a 15-year period in the form of annuities upon the completion of the projects this year. Additionally, the borrowings also encompass the ongoing expansion of the Singapore’s Integrated Construction and Prefabrication Hub (ICPH) plant and the deferred payment scheme for the two LSS4 projects, where construction costs are paid only after the scheduled commercial operation date.

Seizing Growth Opportunities in Data Centre Landscape

Supported by its parent company, Sunway Berhad, with internal contracts accounting for 36% as of 1QFY24 (Refer Chart 3), SunCon remains proactive in its pursuit of external contracts and the company is actively bidding on data center (DC) and industrial projects in both Johor and the Klang Valley. SunCon's foray into this sector is poised for significant advancement, especially with the ongoing development of the Sunway City Iskandar Puteri's Free Commercial Zone, a project overseen by its parent company. Spanning over 135 acres and boasting a Gross Development Value (GDV) of RM8bn, it sets a promising stage for SunCon's expansion. Furthermore, recent announcements from Microsoft on its commitment to invest USD2.2bn over the next four years to propel Malaysia's digital transformation, sparked considerable interest. This commitment has translated into the acquisition of a substantial plot of land in Pulai, Johor, covering 1.1million sqft, likely earmarked for DC. The development opens new avenues for SunCon, positioning it as a frontrunner in the region's DC contracting sphere and further enhancing its profitability prospects, as the segment offer a double-digit margin with shorter project turnaround. Within its portfolio, SunCon’s has already secured contracts worth approximately RM2.0bn for two DC projects in Sedenak, Johor, further solidifying its foothold in this burgeoning market. Additionally, its precast segment stands to benefit from Singapore's neighbouring country, as the Housing Development Board (HDB) has committed to building another 19,600 new flats in 2024. Considering all the emerging opportunities, we believe SunCon's growth trajectory remains strong, supported by a solid outstanding orderbook of RM6.9bn as at 1QFY24.

Maintain BUY with higher TP RM3.69

We maintain SunCon as a BUY with higher TP of RM3.69 (from RM3.19), based on average PER of 19.5x pegged to FY25F EPS of 18.9sen. We continue to like SunCon due to: i) firstmover advantage in Johor's data center industry, ii) steady flow of internal contracts from parent company, and iii) lucrative precast demand from Singapore

Source: BIMB Securities Research - 13 May 2024