• Still BUY, with new MYR4.92 from MYR4.32 TP, 19% upside and c.2% FY24F yield. The Ministry of Industry and Trade of the Socialist Republic of Vietnam (MOIT) has notified Song Hau 2 Power Company of the effective termination of the Build-Operate-Transfer (BOT) contract for the Song Hau 2 thermal power plant (SH2P). The termination came via a letter from MOIT dated 1 Jul informing that the 90-day period since the issuance of the notice of intention to terminate has expired while financial arrangements for SH2P are still not being remedied.

• No impact to Sunway Construction. Toyo Ventures Holdings (TOYOVEN MK, NR), of which Song Hau 2 Power Company is a subsidiary, is evaluating the implications of the said termination and will be seeking legal advice to explore appropriate actions and remedies as per the terms of the BOT contract of SH2P. Notwithstanding this, there is no financial impact to our earnings estimates as we have not included the c.MYR6bn job value of SH2P (effective 55% share) into SCGB’s orderbook.

• We view the abovementioned development to be of no major concern to SCGB as its outstanding orderbook of MYR7.9bn may provide earnings visibility over the next three years. Furthermore, the group may be able to focus on delivering more data centre (DC) jobs that constitute around 50% of its outstanding orderbook. Aside from DCs, SCGB has various tenders related to warehouse and semiconductor manufacturing facilities. It currently only has one warehouse related job – Daiso Malaysia Group’s global distribution centre warehouse worth MYR298m in Port Klang.

• We are taking the opportunity to bump up our job replenishment assumptions for FY25F and FY26F to MYR3.5bn from MYR2.5bn for both years while leaving the FY24F new job target of MYR4.5bn unchanged. We deem the previous targets to be too conservative as Malaysia’s current operating capacity of between 180MW and 200MW of operational capacity will see a 600% growth in the next five years based on Cushman and Wakefield’s APAC Centre Update. In our opinion, we also envisage manpower management to not be a major issue for SCGB, particularly for DC jobs as the group could adopt the job specific hiring model for such jobs.

• Earnings and valuation. Post new job wins target adjustment, we raise FY25F-26F earnings by 14% each. Our new TP of MYR4.92 (from MYR4.32) is derived via pegging FY25F EPS to a target P/E of 21.5x and includes a 6% ESG premium. We believe the target P/E is justified to reflect SCGB’s position in the DC space which may provide a buffer in the event that anticipated infrastructure projects such as the Mass Rapid Transit 3 is further delayed beyond our base case assumption of 1H25.

• Long term catalysts would be Sunway’s (SWB MK, BUY, TP: MYR4.00) hospital expansion plan across Penang, Kelantan and Iskandar Puteri.

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

Source: RHB Research - 5 Jul 2024