PETALING JAYA: A US$2.4bil power plant project in Vietnam will be a “game changer” for Sunway Construction Group Bhd
(SunCon), says CGS-CIMB Research.
The Song Hau 2 power plant, in which SunCon has a 55% stake worth RM6bil, is expected to award a contract by mid-2024 and this is likely to benefit SunCon.
The contract would “eclipse” SunCon’s new-order target of RM2.5bil for the financial year of 2024 (FY24), according to CGS-CIMB Research.
Two important milestones in the past few months indicate that the contract may be awarded in the near-term, likely to SunCon.
On Oct 5, SunCon was awarded preliminary works not exceeding US$9.5mil (about RM45mil), which forms part of the total contract value.
Following this, in November 2023, Toyo Ink Group appointed Export-Import Bank of Malaysia as lead arranger of the syndicated financing facility for the project.
CGS-CIMB Research said the financing facility should help facilitate financial closure for the project.
“We have now built in RM2.8bil and RM4.3bil of new orders for FY24 and FY25 respectively, which only reflect a quarter of the company’s Vietnam project for FY25.
“Our blended FY24-FY25 pre-tax margin for new wins is 7%, below our margin forecast of over 10% for Vietnam,” the research house said in a note.
Over the last seven years, SunCon has clinched an average of RM1.6bil to RM4bil in new order wins a year.
For FY24, it has set a new-order-win target of RM2.5bil, which will be driven by RM1bil in internal projects from Sunway and data centre or industrial warehouses.
Looking ahead, CGS-CIMB Research said SunCon will bid for more sizeable data centre projects.
The construction giant has two existing data centre projects and progress for the larger RM1.7bil data centre in Sedenak Tech Park, Johor, was slow in 2023.
The Sedenak data centre project was worth 26% of SunCon’s total orderbook of RM5.8bil.
“We believe this has since picked up as the client has seen stronger demand for rentals and is in the midst of negotiating higher lease rates.
“We view any risk of cancellation as remote as core building and infrastructure are in place, but we have factored in delays,” said CGS-CIMB Research.
It added that SunCon is a front runner for Mass Rapid Transit 3 and the Penang Light Rail Transit projects.
SunCon may also participate in construction work for Sunway Bhd’s recent joint-venture project with Equalbase, a Singapore-based property company, to develop a warehouse with multi-tenant facilities on 135 acres of land in Johor.
The project has a gross development value (GDV) of RM8bil over a 10-year period.
“Assuming construction cost is 50% of GDV, this represents RM4bil of potential orders,” said CGS-CIMB Research.
The research house said that it favoured SunCon for its strong execution track record, ready pipeline of work from Sunway, and market-leading return on equity of 18% to 22% for FY23-FY25.
However, the key downside risks are increased raw-material costs and labour shortages.
“We reiterate our ‘add’ rating and lift our target price to RM2.70, equivalent to 16.7 FY25 price-to-earnings multiple.
“We also raise our FY24 and FY25 earnings per share by 1% and 7% respectively to factor in higher new order wins,” it said.
