• Stay BUY and MYR3.34 TP, 28% upside and c.4% FY24F yield. Sunway Construction was awarded a contract by Sunway Lost World Water Park, an indirect subsidiary of Sunway (SWB MK, BUY, TP: MYR3.45) for the construction of one commercial block which is the Sunway Ipoh Mall for a contract value of MYR721m. We continue to like SCGB for its steady job replenishment trend (new job wins reached >MYR2bn for two consecutive years in FY22 and FY23).

• Taking this latest job into account, SCGB’s YTD-FY24 new job wins stand at MYR831m – 28% of our FY24F job replenishment target of MYR3bn. During the same period, SCGB had earlier secured three contracts totalling MYR110m; MYR103m for a precast job in Singapore (Ulu Pandan Housing Development Board project) and two packages related to a data centre facility for a multinational technology company in Malaysia (likely to be in Johor) worth MYR6.8m in total. As such, SCGB’s total orderbook is estimated to be at c.MYR6bn – translating into earnings visibility of over two years.

• Drilling on data centre prospects. The two latest data centre packages clinched would be SCGB’s third involvement in data centre projects. On further scrutiny, the said packages relate to early contractor involvement (ECI) services (as such, the low value). Therefore, SCGB may still have the chance to secure more packages from the same data centre project should it perform well for the ECI services, which we view to not be a problem with two ongoing data centre jobs (JHB1X0 and K2 data centre in Johor) in hand.

• Earnings estimates. No changes to our earnings estimates as the latest job win is within our FY24 job replenishment assumption of MYR3bn. Therefore, our TP of MYR3.34, which is derived by pegging our FY25F EPS to an unchanged target P/E of 18.5x – remains unchanged. Our TP also bakes in a 6% ESG premium based on an ESG score of 3.3.

• The stock is currently trading at a 15.3x FY25F P/E, a premium from the Bursa Malaysia Construction Index’s 5-year mean of 13x. We take the view this is justified given SCGB’s ROE which is significantly higher than peers and its potential to benefit from the Johor-Singapore Special Economic Zone via Sunway City Iskandar Puteri or SCIP. Our current estimates have also yet to impute the Song Hau 2 power plant project which may significantly boost its orderbook by c.MYR6bn and increase FY24F earnings by c.8% should the project commence by 1H24. SCGB’s potential to mark its presence in Sarawak via Sunway’s two MoUs with Sarawak-based entities covering a total of 608 acres of land could also serve as a rerating catalyst.

• Key risks: Project delays and a prolonged period of high material costs.

Source: RHB Research - 22 Feb 2024