KUALA LUMPUR: SUNCON (SunCon) is expected to secure new contracts at the higher end of its target for the financial year ending December (FY26), supported by continued demand for data centre (DC) developments, although moderating project margins and a declining return on equity (ROE) profile could weigh on its earnings outlook, according to CGS International (CGSI) Research.
The brokerage said SunCon was likely to achieve new order wins of between RM7 billion and RM9 billion for FY26, following its latest RM920.8 million mechanical, electrical and plumbing (MEP) contract award for an ongoing DC project in Johor.
However, it cautioned that stronger contract wins would need to be matched by earnings growth as market expectations rise.
“While we expect newsflow to continue to buoy interest in the stock, we think this needs to be accompanied by equally strong earnings delivery given the rising expectations,” CGSI Research said in a note to clients today.
The latest contract, announced on Nov 4, was awarded by an existing US multinational corporation (MNC) client and represents the MEP portion of a DC development for which SunCon had previously secured a RM570 million core and shell contract in December 2025.
The client had retained the option to award the MEP works to SunCon under the earlier agreement. The project is scheduled for completion in the first quarter of 2028.
The development forms part of a 220-megawatt DC campus in Iskandar Puteri, Johor Bahru, involving an estimated investment of US$1.66 billion (RM7 billion).
With the latest award, SunCon's year-to-date contract wins reached RM8.06 billion, while its outstanding order book stood at RM11.7 billion as at November 2026.
CGSI Research estimated that the latest project would generate pretax margins of between 8% and 10%, below the 13.3% to 16.5% recorded between the fourth quarter of FY25 and the second quarter of FY26.
It noted that the new contract was structured on a lump-sum basis, potentially pointing to a moderation in margins as the group expands its project portfolio.
SunCon currently has a tender book of approximately RM13 billion, of which about 70% comprises DC projects involving six clients.
The group intends to focus on securing additional work from existing DC developments while selectively pursuing new customers. Potential expansions include the second building of the JHB1XO project, which could be confirmed towards 2027 after the client finalises its tenant, as well as a possible variation order or expansion involving the first building.
Nevertheless, CGSI Research expects SunCon's return on average equity to decline to 45.7% in FY28 from a projected peak of 56.6% in FY26, although this would remain above the 19% to 22% range recorded between FY22 and FY24.
“In our view, Bloomberg consensus has also not factored in the declining ROE (return on equity) profile of Suncon,” it said.
The research outfit expects the group to record a two-year earnings per share compound annual growth rate (CAGR) of 9% between FY26 and FY28.
It added that SunCon would need to broaden its exposure beyond DC projects into government infrastructure, industrial developments and semiconductor factories to reduce reliance on the global artificial intelligence (AI) investment cycle.
CGSI Research maintained its “Hold” recommendation and target price of RM8.30 for SunCon, citing more attractive risk-reward prospects at GAMUDA and IJM Corp Bhd, which offer stronger earnings growth and lower valuations.
It identified higher project costs and a slowdown in global artificial intelligence (AI) capital expenditure as downside risks, while additional domestic and overseas DC contract wins could provide upside potential.
Another analyst familiar with SunCon concurs with CGSI Research's "Hold" call, although she believes the group’s strong positioning in Malaysia’s data centre (DC) construction market should continue to support its near-term earnings and order book growth.
She told Kleverstock that SunCon's RM8.06 billion year-to-date contract wins, RM11.7 billion outstanding order book and RM13 billion tender book provide good earnings visibility, while opportunities to secure additional work from existing DC clients remain encouraging.
"However, the key concern is whether revenue and earnings can grow sufficiently to justify the premium valuation as project margins normalise from the exceptionally high levels recorded in recent quarters.
"SunCon’s heavy reliance on DC-related contracts also exposes it to the risk of a slowdown in global AI infrastructure spending, while its high return on equity may gradually moderate as the current investment cycle matures," said the analyst.
Overall, she said SunCon remains a quality construction player with a strong order book, but much of its growth potential appears to be reflected in its valuation.
Separately, SunCon has secured another RM1.739 billion contract today to undertake the construction of a hyperscale data centre in Bandar Serendah, Selangor.
The group said its wholly-owned subsidiary, Sunway Construction Sdn Bhd, had entered into a construction agreement with an international hyperscaler on Nov 5, 2026, for the project.
The build-only contract covers the construction and completion of the data centre's core and shell structures, campus infrastructure, as well as mechanical, electrical and plumbing (MEP) fit-out works.
Work is scheduled to commence in the fourth quarter of 2026, with completion targeted for the fourth quarter of 2028.
SunCon said the project was not expected to have an immediate material impact on its earnings per share, net assets per share and gearing for the financial year ending Dec 31, 2026.
However, barring unforeseen circumstances, the contract is expected to contribute positively to the group's earnings from FY26 onwards.
The group noted that the project was subject to normal construction-related risks, including fluctuations in material prices, but expected these to be mitigated by its subsidiary's experience and expertise in undertaking construction projects.
With the latest contract, SunCon has secured RM9.8 billion worth of new orders during the current financial year, including the Bandar Serendah project.
Its outstanding order book stood at RM13.4 billion as at Nov 5, 2026.
SunCon also said none of its directors or major shareholders, or persons connected to them, had any direct or indirect interest in the project.