Overview

SUNCON is an integrated construction services provider principally involved in: 1) building and civil infrastructure construction services; 2) foundation and geotechnical engineering services; 3) mechanical, electrical and plumbing services; and 4) manufacturing and sale of precast concrete products.

Investment Themes

• Pioneer Contractor for the Growing ATP Space. SUNCON offers comprehensive construction solutions to its clients, eliminating the need for coordination among various contractors and minimising potential delays from interfacing works. Notably, SUNCON has expanded into the growing advanced technology projects (ATP) sector and has established strong relationships with several renowned multinational technology companies. The group is well-positioned to capitalise on the robust ATP industry outlook, meeting the increasing demand for new data centres and semiconductor assembly factories, which require a higher degree of construction complexity.

• Sizeable outstanding order book and positive outlook for the construction industry. With an impressive RM7.9bn outstanding order book, equivalent to 3x FY23 revenue, SUNCON has robust earnings visibility for the next four years. The group stands to be a potential beneficiary of forthcoming infrastructure projects such as the Penang LRT, KL-SG High Speed Rail (HSR), and MRT Line 3. For overseas expansion, the SUNCON-PECC2 Consortium (SUNCON:Power Engineering Consulting Joint Stock Co 2 (PECC2), 55:45) is poised to start constructing Toyo Ventures Holdings Bhd’s (TVHB) 2.1GW thermal power plant in Vietnam, pending TVHB's successful funding. We expect progress to stay on track, with financing secured by end-June 2024 to avoid project termination and anticipate project award by August 2024. This will contribute an effective contract value of c.RM6.5bn to SUNCON and elevate the order book to a record high of RM9.8bn. Overall, SUNCON's order book replenishment is expected to be further bolstered by internal construction projects, which serve as foundational orders, coupled with another sizeable data centre job tender as well as overseas jobs in the pipeline.

• Sound Balance Sheet. Despite a net gearing ratio of 55.5% in FY23, the group has consistently achieved a high mid-teen return on equity over the past five years. This gearing level is considered healthy and aligns with the company's expansion goals to secure more projects in the ATP industry.

Risk

• The risks to our earnings forecasts include: 1) delays in order book replenishment; 2) project execution risks; 3) potential cost escalation of construction materials; and 4) shortages of construction resources such as labour and machinery.

Source: TA Research - 2 Jul 2024