• Still BUY, new MYR5.50 TP from MYR6.29, 30% upside and c.3% FY25F yield. 1H24 core earnings of MYR64m (+10% YoY) missed our and Street’s estimates at 36% and 35% of full-year projections. The negative deviation was mainly due to lower-than-expected progress billings of certain projects (our earlier projections were too optimistic). While we expect FY24 to see a decline in earnings, we view FY25 to be a supercharged year (earnings projected to grow at c.53%), underpinned by stronger recognition from a mix of data centre (DC) jobs.

• Sunway Construction’s construction arm’s PBT grew 20% YoY in 2Q24 with a stronger PBT margin of 7.8% (2Q23: 7.3%). This was underpinned by accelerated progress on newer projects. However, certain projects such as the JHB1X0 (initial package) DC project at Sedenak Tech Park continues to see sluggish progress at 14.7% in 2Q24 (1Q24: 14.5%). SCGB’s precast segment also recorded a 2Q24 PBT of MYR3.3m (3Q23: MYR3.2m) on a reversal of provisions for completed projects.

• Orderbook update. SCGB’s construction orderbook stood at MYR7.4bn as at end 2Q24 (end 2Q23: MYR5.8bn) with MYR3.5bn orders secured vs our FY24 target of MYR4.5bn. Looking ahead, the group has MYR13.7bn worth of active tenders comprising DC, warehousing, and semiconductor facilities.

• We cut FY24F-26F earnings by 9%, 13%, and 3% as we dial down on the revenue recognition for some projects, particularly the initial package for JHB1X0 at Sedenak Tech Park (completion was relatively unchanged in 2Q24 vs 1Q24 as mentioned above). Consequently, we arrive at a new TP of MYR5.50 by pegging FY25F EPS to an unchanged target P/E of 27x to reflect the breadth of industrial jobs SCGB has (especially DCs) that can weather the risks of not securing public infrastructure jobs. Our TP also bakes in a 6% ESG premium, given the company’s 3.3 score vs the 3.0 country median.

• SCGB is currently trading at 22x FY25F P/E, a premium from the Bursa Malaysia Construction Index’s 10-year mean of 13x. We think this is justified, given its ROE – which is significantly higher than its peers – and SCGB’s position to benefit from an array of catalysts. These include the securing semiconductor-related jobs (SCGB has yet to clinch any) and job wins from the infrastructure space, eg additional Light Rail Transit (LRT) 3 stations and the Segment 2 of the Penang LRT’s Mutiara Line. In the longer run, SCGB is likely to benefit from the Johor-Singapore Special Economic Zone via Sunway City Iskandar Puteri in addition to Sunway’s (SWB MK, BUY, TP: MYR5) hospital expansion plans across Penang, Kelantan, and Iskandar Puteri.

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

Source: RHB Research - 23 Aug 2024