• Maintain BUY and MYR3.81 TP, 15% upside with c.3% yield. On 7 Jun, Toyo Ventures Holdings (TVHB) (TOYOVEN MK, NR) accepted an equipment procurement facility of USD980m for the 2.12GW Song Hau 2 thermal power plant (SH2P) in Vietnam. This facility may finance up to 70% of the invoice amount required to procure equipment related to EPCC works for SH2P. While this does not constitute a financial close for SH2P, we view this as remarkable progress in the execution of the project, after some delays.

• Project details. The SH2P project is owned by TVHB, and will be operated via a build-operate-transfer model by its wholly owned subsidiary, Song Hau 2 Power Company. Back in Mar 2023, Sunway Construction, via a JV with Power Engineering Consulting Joint Stock Company 2 (PECC2), executed a formal contract agreement with the owner to formalise the terms and conditions regarding the EPCC job for SH2P, with SCGB holding a 55% stake in the JV, and PECC2 holding the remaining 45%. The contract value for SH2P is USD2.4bn (c.MYR11.2bn), which brings the value of SCGB’s effective share to c.MYR6bn.

• Indicative earnings accretion if SH2P kicks off. With a targeted duration of close to five years (57 months) and an assumed 7% PAT margin, we estimate that SH2P may boost earnings by <5% for FY24F and 20-35% for FY25F and FY26F, if financial close is obtained by end-June. SCGB’s outstanding orderbook may also expand to a record high of c.MYR12bn from MYR6.3bn currently. Subsequently, we postulate that there could be an indicative upside of 15-20% to our current MYR3.81 TP, if this project commences.

• No changes to our earnings estimates pending financial close of the SH2P project. Hence, our MYR3.81 TP – derived by pegging FY25F EPS to an unchanged target P/E of 20.5x (which bakes in a 6% ESG premium) – is unchanged, for now. We believe that the target P/E is justified, as it reflects SCGB’s position to secure more data centre (DC) jobs in Johor and Selangor. The group has already secured MYR2.8bn worth of DC contracts (which were not in the last construction upcycle in 2017 when it traded at 18.5x P/E).

• The stock is currently trading at 19x FY25 P/E, which is at a premium to the Bursa Malaysia Construction Index’s 5-year mean of 13x. We think this is justified, as SCGB’s ROE is significantly higher than that of its peers, and as it also has the potential to benefit from the Johor-Singapore Special Economic Zone via Sunway City Iskandar Puteri. Long-term catalysts would be Sunway’s (SWB MK, BUY, TP: MYR4) hospital network expansion plan across Penang, Kelantan, and Iskandar Puteri.

• Key downside risks include project delays and a prolonged period of high material costs.

Source: RHB Research - 10 Jun 2024