• Still BUY, new MYR2.05 TP from MYR2.07, 19% upside, c.4% FY23F yield. Sunway Construction’s 1Q23 core profit of MYR25.9m (-27% YoY) was below estimates, at 16% and 17% of our and Street’s full-year projections. The negative deviation was mainly due to higher-than-expected finance costs. We project a 5-year earnings CAGR of 15% for SCGB, backed by the data centre job in Johor (higher margins, faster turnaround period) and steady job awards from its listed parent – currently accounts for 37% of its outstanding orderbook.

• Segmental review. In terms of PBT, the construction segment reported a 22% YoY decline in 1Q23 as some major projects such as the MYR1.7bn data centre job in Sedenak Technology Park (STeP) Johor are still in the early stages. Its precast segment recorded 1Q23 PBT of MYR1.3m (1Q22: MYR1m) with its growth capped by depreciation costs incurred for the new Integrated Pre-Cast Hub in Singapore.

• Prospects. Construction orderbook stood at MYR6bn at end 1Q23 (end 4Q22: MYR5.3bn) with MYR1.3bn orders secured vs our MYR2.3bn FY23 job replenishment target. We expect higher progress billings in the remaining quarters, underpinned by SCGB’s steady labour supply (600-700 workers). SCGB has MYR22.7bn worth of active tenders including two bids (CMC301 and CMC302 work packages) under the Mass Rapid Transit 3 (MRT3) project and some data centre jobs in the Klang Valley. All in, we think SCGB’s foray into the data centre space will buffer downside risks from public infrastructure jobs.

• FY23-25F earnings cut by 8%, 7%, and 2% to account for higher finance costs, mainly from India’s highway projects. SCGB’s potential involvement (likely known by end 1H23) in the Song Hau 2 power plant in Vietnam could boost its orderbook by MYR6bn. Its current exposure in STeP via Yondr Group could also enable it to win more data centre jobs, with Princeton Digital Group planning to build a 150MW data centre in STeP.

• Post earnings adjustment and rolling forward our valuation base (FY23 to FY24), we arrived at our new MYR2.05 TP, with a 4% ESG premium added to our intrinsic valuation. Our unchanged 15.5x valuation target (above the 12x 5-year mean P/E of Bursa Malaysia Construction Index) pegged to FY24F EPS is justified based on SCGB’s commendable orderbook/revenue cover of c.2.8x. Valuations appear undemanding, as SCGB is trading at 13.6x FY24F P/E (-1SD from its 5-year mean). Key risks: Project delays and prolonged period of high material costs.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we tweaked our ESG weightage. We now 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: Envisioning a Better Future.

Source: RHB Research - 23 May 2023