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Keep BUY, with new MYR2.07 TP from MYR1.93, 30% upside and c.5% yield. Sunway Construction secured a contract on 31 Dec 2022 from Yellowwood Properties to carry out general contractor services (ie main building architecture works) for a data centre in Sedenak Tech Park (STeP) in Johor. The contract value is c.MYR1.7bn and would commence from 31 Dec 2022 and be completed by 3Q24. The latest job win indicates SCGB’s efforts to diversify its job base from infrastructure and internal jobs.
Further details on the job win. Profitability wise, we gathered that the PAT margin for the data centre project may range between 7-8%. The latest job win brings SCGB’s estimated total outstanding orderbook to c.MYR5.7bn, representing a healthy 3.3x orderbook/revenue cover ratio (higher than peer average of 3x). In terms of FY22 new job wins, the latest contract secured brings SCGB’s FY22 job wins to MYR2.6bn – exceeding our total FY22 orderbook replenishment assumption of MYR2.3bn (construction: MYR2bn, precast: MYR300m). Given the contract was awarded on 31 Dec 2022, earnings accretion would only occur from FY23F.
Prospects. Despite the possible delay or cost review for the Mass Rapid Transit 3 (MRT3) civil work packages, we believe the risks of slow job replenishment from this project could be mitigated by the group’s >MYR10bn active tenderbook size, which includes factories and data centres, amongst others. Moreover, its listed parent should continue to support earnings visibility whereby c.40% of the new job wins (excluding the latest job win) in FY22 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 and precast walls from just mainly prefab bathroom units.
Forecasts. We revise our FY23F-24F earnings by +10% and +14% as we factor in the latest job win and increase our job replenishment assumptions to MYR2.5bn from MYR2bn for FY23 and to MYR2.5bn from MYR1.5bn for FY24. Meanwhile, we leave our job FY22 earnings unchanged as the latest data centre job was awarded on 31 Dec 2022 and we view that revenue recognition of some jobs may have picked up in 4Q22 in light of normalising operating conditions. Further earnings upside could come from the interim agreement with Toyo Ink Group and Song Hau 2 Power Company to develop a power plant in Vietnam if it is finalised by end-1H23 – contributing an additional orderbook of MYR6bn to SCGB.
Post earnings revision, we derive a new TP of MYR2.07 with an unchanged 15.5x target P/E pegged to FY23F EPS after imputing a 4% premium to our intrinsic valuation based on our ESG scoring methodology. The valuation target is above the KL Construction Index’s (KLCON) 5-year mean of 12x – to reflect SCGB’s commendable orderbook/revenue cover of c.3.3x, backed by a manageable balance sheet.
Key risks: Project delays and prolonged period of high material costs.
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