• Still BUY, with new MYR2.42 TP from MYR2.22, 11% upside and c.3% FY24F yield. We believe Sunway Construction is in a sweet spot to benefit from the Johor-Singapore Special Economic Zone (JS-SEZ) from various angles, from industrial buildings to renewable energy (RE). We still favour SCGB and even without the JS-SEZ – prospects are backed by Mass Rapid Transit 3, reinstatement of Light Rail Transit (LRT) 3 stations, and Penang LRT. The financial close of Song Hau 2 power plant (expected by end- 1H24) may add c.MYR6bn to its orderbook (latest orderbook: c.MYR5.8bn).

• Market speculation is rife on the exact location of the JS-SEZ – either in Kulai which houses the Sedenak Tech Park (STeP) or somewhere near the Tuas Link. Should the JS-SEZ be situated near the Second Link, we may likely see spillover effects on the Sunway City Iskandar Puteri (SCIP) (GDV: c.MYR30bn) with c.1,770 acres of land near the Second Link and subsequently, towards SCGB. SCGB has completed c.MYR1.7bn worth of projects in Johor with c.MYR900m jobs in SCIP. Assuming the JS-SEZ is in Kulai, SCGB already has a foothold in places like STeP via the MYR1.7bn data centre project it secured in Dec 2022.

• RE initiatives mentioned in the MoU of the JS-SEZ could likely spell opportunities from the EPCC of solar plants, in our view. Recall that SCGB has secured c.MYR500m of EPCC contracts for solar projects. Solar energy prospects could be further backed by Malaysia’s move to reverse the policy of banning exports of RE to Singapore.

• Even putting the JS-SEZ factor aside, Singapore real estate group, Equalbase will jointly develop an MYR8bn carbon neutral logistics hub with Sunway (SWB MK, BUY, TP: MYR3.00) in a free commercial zone within SCIP. Aside from residential and retail premises – SCGB was previously involved in industrial projects in Johor such as the MYR121m job for the Bio-Xcell plant. SCGB has strengthened its muscle for industrial jobs in general after securing the MYR298m (50% effective share via SCGB- Kajima (Malaysia) JV) from Daiso Malaysia Group for a global distribution centre warehouse in Pulau Indah, Selangor. Therefore, we view SCGB to be eyeing projects under the said MYR8bn carbon neutral logistics hub.

• No changes to our earnings estimates but we are adjusting our target P/E (pegged to our FY24F EPS) to 18.5x from 17x. As such, we arrive at a new TP of MYR2.42 after imputing a 6% ESG premium based on our proprietary ESG scoring methodology. We believe this target P/E (which is above its 5-year mean P/E of 16x) is justified as SCGB was trading near around 18.5x during the mid-2017. Moreover, the stock’s 17.8x FY24F P/E is below the target P/E. Additional catalysts could be SCGB’s potential participation in the Johor Bahru LRT, which we view as likely given its current MYR605m contract for the JB-Singapore Rapid Transit System (RTS) Link.

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

Source: RHB Research - 12 Jan 2024