• Still BUY and MYR2.07 TP, 21% upside and c.5% yield. We expect 1Q23 core earnings to be higher YoY, reaching MYR37-40m vs 1Q22 core profit of MYR35m. This is underpinned by higher estimated progress billings of certain projects (particularly from its parent) as the projects move higher along the S-curve. Sunway Construction’s potential involvement in the Song Hau 2 power plant in Vietnam alongside data centre projects under its tenderbook size of c.MYR20bn may mitigate downside risks from the Mass Rapid Transit 3 (MRT3) jobs.

• We estimate SCGB’s latest outstanding orderbook to be c.MYR6bn, translating into around three years of earnings visibility. SCGB has secured c.MYR1.2bn of new jobs in FY23 vs our FY23 job replenishment target of MYR2.3bn. An upside to its orderbook would be the materialisation of the Song Hau 2 power plant in Vietnam (likely to be known by end 1H23) which may fetch a job value of c.MYR6bn. Our preliminary analysis based on an S-curve estimates that the project may boost earnings by 9%, 37% and 39% from the current FY23F-25F (assuming a 7% PBT margin).

• Bayan Lepas Light Rail Transit (LRT) development. The Penang Government received eight submissions from local and international contractors which also comprised of consortiums for the Bayan Lepas LRT pre-qualification exercise conducted in Jul-Oct 2022. Recall that SCGB also participated in the pre-qualification stage for the Bayan Lepas LRT. With SCGB’s experience in LRT3 via a contract worth MYR1.3bn (post revision) awarded in Oct 2017 in addition to Mass Rapid Transit 2 jobs – we foresee the company having a high chance to be pre-qualified and securing a job package under the Bayan Lepas LRT project.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

• We make no changes to our earnings estimates whereby revisions may take place if the said power plant project takes off. Our ESG score of 3.2 also remains despite the weightage change of the E, S and G pillars. As such, our TP of MYR2.07 is unchanged after imputing a 4% ESG premium to our intrinsic valuation based on our latest in-house proprietary ESG 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 KL Construction Index’s 5-year mean of 12x – to reflect SCGB’s commendable orderbook/revenue cover of c.2.8x, backed by a robust balance sheet with a net cash position of c.MYR50m as at end FY22. All in, valuation appears undemanding as the stock is trading at 12.6x FY24F P/E, -1.5SD from its 5-year mean. Other catalysts for the stock include securing more jobs from the industrial building space which includes data centres.

• Key risk includes slower-than-expected rollout of projects.

Source: RHB Research - 17 May 2023