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KUALA LUMPUR: RHB Research is optimistic about Sunway Construction Group Bhd’s (SunCon) district cooling system (DCS) project, as it allows the group to accelerate the DCS technology adoption in its future developments.
It believes this marks a “cool start” for SunCon as it can leverage on sustainable green cooling systems that could speed up the use of DCS technology in other projects.
The research house is keeping an “add” call on SunCon with a target price of RM1.93.
Recently, SunCon announced that it had entered into a build, own, operate and transfer agreement with Sunway South Quay Sdn Bhd (SSQ).
SSQ is an indirect wholly-owned subsidiary of Sunway Bhd and Engie-Sunway DCS Sdn Bhd, a 40%-owned associate company of SunCon.
Engie-Sunway DCS is the join-venture company between Sunway SK Sdn Bhd, an indirectly wholly owned subsidiary of SunCon, and ECM Cooling Sdn Bhd.
The agreement involves building a DCS and supplying cooling energy to SSQ’s development, known as Sunway South Quay Commercial Precinct 2, for 25 years – after which the DCS is transferred to SSQ.,
Based on the terms, Sunway Engineering, an indirect wholly-owned subsidiary of SunCon, would perform engineering, procurement and construction scope of works for the DCS.
“The contract value could be RM35mil to RM40mil with an expected net margin of 5% to 8% and SunCon could recognise a net profit of around RM1.8mil, assuming a 5% net margin over three years for the completion of the DCS,” said RHB.
It said the annual profits from the DCS operation, attributable to Sunway SK Sdn Bhd’s 40% portion, are minimal over the operating period of less than 0.5% of financial year 2022 (FY22) forecast profits.
“Due to the expected minimal net profit from constructing the DCS, combined with the probability of the DCS to generate income only after two years of operation, we make no changes to our earnings estimates,” it added.
RHB believes its unchanged valuation target price-to-earnings ratio (P/E) of 15.5 times, pegged to its FY23 earnings per share, is fair and reflects SunCon’s high likelihood of securing the Mass Rapid Transit 3 jobs, combined with its steady internal jobs.
The research house said the key risks to the DSC project are the possible cost overruns and higher material costs.