• Still BUY and MYR1.93 TP, 35% upside and c.5% FY23F yield. Sunway Construction’s 9M22 core net profit met our and Street expectations – accounting for 72% and 76% of full year projections. Its listed parent should continue to support earnings visibility whereby 49% of its outstanding orderbook comes from internal building contracts. This is in addition to its diverse portfolio of jobs comprising overseas highways in India, solar energy infrastructure and various purpose-built buildings.

• Results review. SCGB reported a stronger 3Q22 core net profit of MYR26.9m, which was 12% YoY higher, underpinned by the 73% YoY expansion in revenue to reach MYR469.3m (3Q21: MYR272m). In terms of PBT, the construction segment reported a 30% YoY growth amid normalisation of works to full capacity. Meanwhile, its precast segment recorded 3Q22 PBT of MYR2.6m compared to a loss-before-tax of MYR2.4m in 3Q21 as the pre-cast plants in Johor were affected by the MCO and only recommenced operations towards end-Sep 2021. Cumulatively, the group recorded 9M22 core net profit of MYR100.2m (+94% YoY), translating into a core net margin of 6.1% (9M21: 4.7%).

• Prospects. SCGB’s construction orderbook stood at MYR4.1bn as at end- 3Q22 (end-2Q22: MYR4.2bn). New YTD job wins currently stand at MYR881m (vs our FY22 job replenishment target of MYR1.5bn). Despite the highly possible delay of the award for Mass Rapid Transit 3 (MRT3) civil work packages to 1Q23 (from 4Q22), we believe that our FY22F replenishment target of MYR1.5bn could likely be met. This is backed by the group’s MYR17.7bn active tender book size which includes factories and data centres, amongst others. Moreover, its listed parent should continue to support earnings visibility whereby c.40% of the total new job wins in FY22 thus far were internal. Its Integrated Construction and Prefabrication Hub (ICPH) plant in Singapore is likely to begin operations in early FY23 – expanding the precast product range to include large panel slabs, precast walls and tunnels from just mainly prefab bathroom units.

• Forecasts and valuation. We make no changes to our earnings forecasts as results were within expectations. Our valuation target P/E of 15.5x, which is pegged to our FY23F EPS, remains unchanged. The valuation target is above the KLCON Index’s 5-year mean of 12x – to reflect SCGB’s commendable orderbook/revenue cover of c.2.3x, backed by a robust balance sheet with a net cash position. All in, our TP of MYR1.93 remains unchanged after imputing a 4% premium to our intrinsic valuation based on our proprietary ESG scoring methodology. Valuation appears undemanding as the stock is trading at 12.2x FY23F P/E, or -1.5SD from its 5-year mean.

• Key risks include project delays and prolonged period of high material costs.

Source: RHB Research - 23 Nov 2022