• Still BUY, TP rises to MYR6.29 (from MYR4.92) TP, 24% upside and c.2% FY24F yield. We remain upbeat on Sunway Construction’s growth prospects, which are backed by data centre (DC) works contracts as well as other industrial jobs such as warehouses and semiconductor manufacturing facilities. Our estimated job wins of at least MYR4bn pa backs our 3-year earnings CAGR (2023-2026) of 24%.

• Expecting more DC wins. Sunway (SWB MK, BUY, TP: MYR5.00) hived off two parcels of land spanning 64 acres in Sunway City Iskandar Puteri (SCIP) to Singapore-based Equalbase for the purpose of DC development. This is in addition to Equalbase’s MYR8bn carbon-neutral logistics hub in a free commercial zone of SCIP. We envisage SCGB to be a frontrunner for either the said logistics hub or any DC construction job in SCIP.

• The value of industrial property transactions in Selangor grew by 20% YoY in 1Q24 while Johor registered a larger growth of 61% YoY in the same period, according to the National Property Information Centre. Going forward, SCGB may regard other types of industrial buildings to be a strategic cushion, if the DC construction market gets too saturated. SCGB is currently involved in Daiso Malaysia Group’s global distribution centre warehouse project worth MYR298m in Port Klang.

• SCGB’s foreign ownership has stayed above 2.5% over March-May vs Nov 2023-to-Jan 2024 when the figure hovered between 0.5% and 0.6%. Record- high foreign shareholding levels since its listing in 2015 were chalked in May 2016, at 11%. We anticipate foreign shareholding levels to gradually rise in the coming months, in light of the upcycle of the construction sector.

• We take the opportunity to bump up our job replenishment assumptions for FY25F and FY26F to MYR4bn each (from MYR3.5bn), which leads to a 2% increase in FY25-26F earnings. This is to pencil in the growth prospects of its industrial building segment, underpinned by robust FDI prospects. Malaysia has approved MYR83.7bn (+13% YoY) of investments for 1Q24 with foreign investments making up c.56% of the total.

• The valuation of the construction sector may be set for a re-rating amidst an imminent slew of public infrastructure projects, combined with the growth in demand for industrial buildings (absent in the 2017 sector upcycle). As such, we are ascribing a new target P/E of 27x (from 21.5x) for SCGB, which is higher than the large-cap peer average of 25x, to reflect the breadth of industrial jobs it has (including DCs). This enables it to weather downside risks related to the possibility of not securing public infrastructure jobs.

• Post earnings and target P/E adjustment. We derive a new TP of MYR6.29 (from MYR4.92) after pegging FY25F EPS to the new target P/E. Our TP also bakes in a 6% ESG premium. Key catalysts: Potential involvement in the Penang Light Rail Transit project, and SWB’s hospital expansion plan across Penang, Kelantan and Iskandar Puteri. Key downside risk: Inability to consistently secure new jobs.

Source: RHB Research - 19 Jul 2024