• Stay BUY, new MYR2.22 TP from MYR2.03, 16% upside with c.4% FY24F yield. Sunway Construction is in a sweet spot to benefit from potential property and infrastructure development opportunities in Johor – particularly in the Iskandar region – via its parent Sunway’s (SWB MK, BUY, TP: MYR2.65) 50% landbank exposure in Johor. This is premised on the group’s track record within Iskandar, and would be on top of the ongoing Johor jobs for the Sedenak Technology Park (STeP) data centre project and Johor Bahru-Singapore (JB-SG) Rapid Transit System (RTS) Link.

• No stranger to Johor. Even before venturing into the data centre space via the MYR1.7bn contract in STeP and the packages for the JB-SG RTS Link worth MYR605m, SCGB was already in involved in a variety of projects in the southern West Malaysia state. It had completed c.MYR1.7bn worth of projects in Johor – these were spread over 12 contracts that were mostly related to residential and commercial property projects, with the remainder comprising industrial and infrastructure jobs (Figure 1).

• Sizeable track record in Iskandar. Sunway has 1,632 acres of land situated near the Malaysia-Singapore Second Link bridge. Note: Its total landbank in Malaysia spans 3,200 acres. As such, the location of its land implies that the conglomerate’s Sunway Iskandar project (GDV: MYR29bn) should benefit from ongoing and upcoming infrastructure development catalysts, as well as the influx of investments in Johor. Taking this into consideration, we believe SCGB has a reasonable chance of securing more projects in Johor, from its parent. Out of the c.MYR1.7bn worth of projects completed by SCGB in Johor, around 62% was awarded by Sunway and is related to Iskandar (Figure 1).

• Prospects. SCGB’s MYR27bn tenderbook mainly comprises Mass Rapid Transit 3 or MRT3 packages and the Song Hau 2 power plant in Vietnam. Nevertheless, there are also tenders related to Johor – namely for JB-SG RTS Link’s packages 2A and 2B for the Immigration, Customs and Quarantine Complex. Another development to look out for is the proposed Iskandar Puteri station under the previous alignment of the Kuala Lumpur Singapore High Speed Rail (HSR). This station, which was to be near Sunway’s project, could be reinstated in the new HSR plan.

• There are no changes to our earnings estimates but we tweak our target P/E (pegged to our FY24F EPS) to 17x, from 15.5x (5-year mean P/E: 14x). This new target P/E is justified, as we take into account the group’s potential to leverage on Johor’s growth, particularly in Iskandar. As such, we arrive at a new TP of MYR2.22 after imputing a 6% ESG premium, based on our proprietary ESG scoring methodology. All in, we favour SCGB for its steady job replenishment (MYR1.5bn secured YTD, its FY23 target of MYR2bn) and potential to secure more solar plant EPCC jobs under the National Energy Transition Roadmap – which will reduce its reliance on internal jobs.

• Key downside risks: project delays and raw material costs staying elevated for a longer period.

Source: RHB Securities Research - 7 Sept 2023