• Still BUY with MYR2.07 TP, 24% upside and c.5% FY23F yield. Sunway Construction has executed a formal contract agreement with Power Engineering Consulting Joint Stock Company 2 (PECC2) to formalise terms and conditions governing the EPC works for the Song Hau 2 Thermal Power Plant project (2x1,060MW capacity) in Vietnam. Both parties also inked a formal agreement with the project owners, Toyo Ink Group and Song Hau 2 Power Company. We note that only an interim agreement was inked between the parties on 28 Dec 2022.

• The agreements. The consortium agreement finalised the JV portion at 55% for SCGB and 45% for PECC2, vs 60% and 40% under the interim agreement. Meanwhile, the formal contract agreement between the JV company and the owners saw the contract price revised to USD2.4bn (c.MYR10.8bn) from USD2.2bn. As a result, SCGB’s portion of the contract remains at c.MYR6bn, while PECC2’s effective value rose to MYR4.9bn from MYR3.9bn. We believe the revisions were done to enable a higher participation from PECC2 as a local partner in the project, therefore mitigating execution risks, as this is SCGB’s first venture in Vietnam.

• Other salient details. Construction of the power plant will commence after the JV company receives the Notice to Proceed (NTP) from the owners. The NTP can only be issued by the owners once they obtain the financial closing (expected by the end of June).

• Our view. While the said agreements do not enable the project to be recognised in SCGB’s orderbook, the formal contract agreement demonstrates the owners’ commitment to fulfil the requirements and source financing for the project. Should the project owners reach financial close by the end of June, SCGB’s orderbook will rise to a record high of c.MYR11bn. Our preliminary analysis, based on an S-curve, estimates that the power plant project could boost earnings by 9%, 37%, and 39% from current FY23- 25F estimates by assuming a 7% PBT margin.

• We keep our earnings estimates, pending the project’s financial close. As such, our MYR2.07 TP is unchanged, after imputing a 4% ESG premium to our intrinsic valuation based on our proprietary scoring methodology. Our valuation target P/E of 15.5x, which is pegged to our FY23F EPS, is maintained. The valuation target is above the KLCON index’s 5-year mean of 12x to reflect SCGB’s commendable orderbook/revenue cover of c.2.7x, backed by a robust balance sheet with a net cash position of c.MYR50m as at end FY22. All in, valuations appear undemanding, as the stock is trading at 12.3x FY24F P/E (-1.5SD from its 5-year mean). Other catalysts for the stock include securing high-margin jobs from the data centre space.

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

Source: RHB Research - 2 Mar 2023