• Maintain BUY and MYR5.50 TP, 51% upside with 3% FY25F yield. Outgoing US president Joe Biden's restriction of artificial intelligence (AI) chip exports to Tier-2 countries like Malaysia should have a limited impact on Sunway Construction. SCGB's major data centre (DC) clients are mainly from Tier-1 countries, which could obtain the Universal Validated End User (UVEU) status, enabling larger quantities of AI chips to be brought into Tier-2 countries. Hence, we believe SCGB's latest selldown is overdone. We make no change to our TP and earnings estimates, for now.
• While DCs easily make up 50% of SCGB's outstanding orderbook, roughly 80-90% of its DC orderbook is related to clients that are headquartered in Tier-1 countries. As for its MYR11bn active tenderbook (as at end-Sep 2024), we understand that DC-related tenders could be up to 80%, ie worth MYR9bn. On further scrutiny, we gathered that the majority of DC tenders are related to project owners headquartered in Tier-1 countries. Therefore, it could be the case that these DC clients would apply for the UVEU status.
• To address the concern of these DC clients of likely having off-takers from Tier-3 countries (such as China, according to the US Bureau of Industry and Security), we gathered that SCGB's DC clients are either hyperscalers who are building DCs for their own consumption or co-location providers that mostly have off-takers from non-Tier 3 countries.
• JHBX10 DC job in Johor. We believe SCGB may have a chance in clinching future expansion works for the JHBX10 DC (client from a Tier-1 country) as we gathered that total planned capacity is to be 200-300MW. SCGB's MYR3.9bn of total jobs awards for the said DC is estimated to cover between 100MW and 150MW of capacity contracted out, based on our projections.
• Looking ahead, incoming DC capacity in Malaysia may mainly still come from DC providers from Tier-1 countries (Figure 1) which may continue providing potential opportunities for SCGB. Additionally, other potential jobs for SCGB include the Segment 2 of the Penang Light Rail Transit, and upcoming medical centres from its parent Sunway (SWB MK, BUY, TP: MYR5.75).
• No changes to our estimates. As such, our TP of MYR5.50 (which bakes in a 6% ESG premium) remains put. Our TP was derived by pegging FY25F EPS to an unchanged target P/E of 27x to reflect SCGB's prominence for DC providers from Tier-1 countries. The stock is currently trading at 18.9x FY25P/E - close to the 18x observed during the 2017 construction upcycle (which had no DC factor at that time) - which we view is unjustified, based on the nation's digitalisation push which could ensure that investments by global tech giants in Malaysia remain in place.
• Key risks: Lower-than-expected job wins.

Source: RHB Research - 20 Jan 2025