• Still BUY with MYR2.22 TP, 18% upside and c.4% FY24F yield. Sunway Construction’s 9M23 core profit of MYR96.1m (-2% YoY) was broadly inline with our estimates but trailed the Street’s projections – at 71% and 68% of full-year projections. We view that 4Q23 would be a stronger quarter as new jobs, ie Daiso warehouse and K2 data centre (both awarded in early October), have started works. We project earnings growth in FY24 and FY25 to be between 10% and 20% – backed by steady job awards from its parent plus fast turnaround industrial jobs.

• SCGB posted MYR48m (+28% YoY) PBT in 3Q23, with the construction segment reporting a 19% YoY increase in PBT for the same quarter due to accelerated progress in newer projects. Meanwhile, its precast segment recorded a 3Q23 PBT of MYR6.5m (3Q22: MYR2.6m), supported by better progress in projects related to the Integrated Construction and Prefabrication Hub (ICPH). The PBT margin of the precast segment was also higher at 7.8% in 3Q23 (3Q22: 5.2%) due to reversal of provisions for completed projects in the quarter.

• Prospects. SCGB’s construction orderbook stood at MYR5.8bn as at end- 3Q23 (end-3Q22: MYR4.1bn) with MYR2.2bn orders secured – vs our FY23 job replenishment target of MYR2.5bn backed by a MYR26bn tenderbook. We expect higher billings in the remaining quarters as progress of projects move higher along the S-curve. We expect job replenishment to remain steady, backed by its parent which contributed c.40% of YTD job wins while SCGB continues to participate in tenders related to warehousing and semiconductor facilities. Moreover, the Song Hau 2 power plant project in Vietnam worth MYR6bn is awaiting financial close – likely by 1Q24 in our view, which may potentially boost FY24-25F earnings by 30-35%. SCGB’s success in securing a 29.9MW quota under the Corporate Green Power Programme creates a new source of recurring income.

• No changes to our earnings estimates as we expect 4Q23 to record higher progress billings of ongoing projects. Hence, our TP remains at MYR2.22, imputing a 6% premium to our intrinsic valuation based on our ESG scoring methodology. Our unchanged valuation target of 17x (above Bursa Malaysia Construction’s 5-year mean P/E of 12.6x) – pegged to our FY24F EPS is justified based on SCGB’s steady job flows varying from renewable energy, infrastructure, commercial, and industrial buildings. SCGB’s portfolio of data centre jobs may enable the group to leverage on the Southeast Asian data centre construction market, which is expected to grow USD3.6bn from 2021-2025. We think the counter still has further upside owing to its rail credentials – enabling it to clinch upcoming rail projects eg Mass Rapid Transit 3 and Bayan Lepas Light Rail Transit. Key risks include project delays and a prolonged period of high material costs. 

Source: RHB Securities Research - 22 Nov 2023