• Keep BUY, new MYR2.03 TP from MYR2.08, 13% upside, c.4% FY24F yield. Sunway Construction’s 1H23 core profit of MYR58.2m (-20% YoY) trailed estimates, at 38% and 39% 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 25% for SCGB, backed by the Johor data centre job (higher margins, faster turnaround) and steady job awards from its listed parent (c.40% of its outstanding orderbook).

• SCGB posted a MYR42m (-2% YoY) PBT in 2Q23, with the construction segment reporting a 5% YoY PBT decline during the quarter, as 2Q22 saw the finalisation of accounts for some completed projects. This offset the 2.4% YoY increase in construction revenue for 2Q23 amid better progress of new projects. Its precast segment recorded a 2Q23 PBT of MYR3.2m (2Q22: MYR1.9m), supported by better progress in projects related to the Integrated Construction and Prefabrication Hub (ICPH).

• Prospects. SCGB’s construction orderbook stood at MYR5.8bn as at end 2Q23 (end 2Q22: MYR4.2bn) with MYR1.6bn orders secured, vs our FY23 job replenishment target of MYR2.3bn, backed by a MYR27bn tenderbook. We expect higher billings in remaining quarters as progress of projects move higher along the S-curve. We believe job replenishments will remain steady, backed by its parent which contributed 56% of YTD job wins, while SCGB has participated in two new tenders under the Rapid Transit System (RTS) link. Also, the MYR6bn Song Hau 2 power plant project in Vietnam, which is awaiting financial close – likely by September or October – could boost FY24-25F earnings by 30-35%. SCGB’s success in securing a 29.9MW quota under the Corporate Green Power Programme may also enable it to create a new source of recurring income.

• We cut FY23-25F earnings by 12%, 3%, and 2% to account for higher finance costs, particularly from India’s highway projects. As such, we arrive at our new MYR2.03 TP with an unchanged 15.5x target P/E pegged to our FY24F EPS – after imputing a 6% ESG premium based on SCGB’s ESG score of 3.3 (above the country median). While we now forecast a 6% earnings drop for FY23, FY24, and FY25, core profit is projected to grow >10% each year, backed by increased billings and steady job wins.

• The 15.5x valuation target (above Bursa Malaysia Construction’s 5-year mean P/E of 12x) pegged to our FY24F EPS is justified, based on SCGB’s consistent job replenishment trends and its rail credentials – giving it a chance to clinch upcoming mega projects. Short- to medium-term catalysts include faster-than-expected awards of industrial buildings (warehouses, factories, data centres) and infrastructure projects such as the Bayan Lepas Light Rail Transit and Mass Rapid Transit 3.

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

Source: RHB Securities Research - 24 Aug 2023