• BUY, new MYR3.34 TP from MYR2.42, 28% upside, c.4% yield. FY23 core net profit of MYR170.2m (FY22: MYR144m) exceeded our and Street’s estimates at 126% and 122% of full-year projections. The positive deviation was due to higher-than-expected progress billings of ongoing projects (mainly internal projects). We expect FY24 to see >10% core earnings growth, backed by data centre jobs in Johor (ramped up progress) and steady internal jobs from its listed parent (38% of its outstanding orderbook).

• The construction arm’s 21% YoY revenue growth in FY23 was offset by lower PBT margin of 7.1% (FY22: 8.8%) as FY22 saw the finalisation of accounts for some projects and reversal for a legal case provision. Sunway Construction’s precast segment saw FY23 PBT of MYR18.7m (+75% YoY) vs MYR10.7m in FY22, supported by better activity at its Integrated Construction & Prefabrication Hub amid better precast demand.

• Prospects. SCGB’s construction orderbook stood at MYR5.3bn at end-4Q23 (end-4Q22: MYR5.3bn) with MYR2.5bn orders secured. Looking ahead, SCGB has MYR26bn worth of active tenders comprising two bids under the Mass Rapid Transit 3 (MRT3) project, some warehousing and semiconductor facilities, as well as internal bids. Additional job replenishment could come from the reinstatement of five Light Rail Transit (LRT) 3 stations, Bayan Lepas LRT, and Sunway City Iskandar Puteri (SCIP) located near the Second Link.

• We revise FY24-25F earnings by +22% each after bumping up our new job win assumptions to MYR3bn (from MYR2.5bn) and MYR2.5bn (from MYR2bn) for FY24F and FY25F. Our FY24F job win target is at the higher end of SCGB’s guidance of MYR2.5bn-3bn, given the aforementioned prospects. We also introduce FY26F earnings, with a job win assumption of MYR3bn. Post earnings adjustment and rolling forward our valuation base to FY25F, we derived our new MYR3.34 TP via pegging our FY25F EPS to an unchanged 18.5x target P/E. Our TP also bakes in a 6% ESG premium based on an ESG score of 3.3.

• The stock is trading at 15.3x FY25P/E, a premium to the Bursa Malaysia Construction Index’s 5-year mean of 13x. We think this is justified, given SCGB’s ROE which is significantly higher than its peers, and its potential to benefit from the Johor-Singapore Special Economic Zone via SCIP. Our current estimates have also yet to impute the Song Hau 2 power plant project which may significantly boost its orderbook by c.MYR6bn and increase FY24F earnings by c.8% if the project commences by 1H24. SCGB’s potential to mark its presence in Sarawak via Sunway’s (SWB MK, BUY, TP: MYR3.45) two MoUs with Sarawak-based entities, covering a total of 616 acres of land, could also serve as a rerating catalyst.

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

Source: RHB Research - 21 Feb 2024