Sunway Construction - Catalysts Intact Despite a Muted 1Q24; BUY

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  • Still BUY, new MYR3.81 TP (from MYR3.34), 14% upside, c.2% yield. 1Q24 core net profit of MYR27m (+4% YoY) missed our and Street’s estimates at 14% and 15% of full-year projections, mainly due to lower-than-expected progress billings of ongoing projects. While we expect Sunway Construction to see 5% YoY core earnings growth in FY24, we think FY25 will be a supercharged year underpinned by stronger recognition from a mix of data centre (DC) jobs and steady internal contracts (from its listed parent), which make up 34% of its outstanding orderbook.
  • The construction arm’s PBT only grew 5% YoY in 1Q24 vs 16% YoY revenue growth in 1Q24, leading to a lower PBT margin of 7% (1Q23: 7.7%). This was mainly due to internal residential projects with thinner margins. The precast segment saw 1Q24 PBT of MYR3.7m vs MYR1.3m in 1Q23 supported by better activity at the group’s Integrated Construction & Prefabrication Hub amid better precast demand.
  • Prospects. SCGB’s construction orderbook stood at MYR6.3bn at end-1Q24 (end-1Q23: MYR6bn), with MYR1.7bn orders secured YTD (FY24 target: MYR3bn). Looking ahead, SCGB has MYR9.4bn worth of active tenders comprising DC, warehousing, and semiconductor facilities. Additional job replenishment could come from the reinstatement of five Light Rail Transit (LRT) 3 stations and the Penang LRT Mutiara Line via Segment 2.
  • We cut FY24F earnings by 10% but revise FY25-26F earnings upwards by 2- 4% each as we backload revenue recognition for some jobs, particularly the DC job in Sedenak Tech Park (completion rate relatively unchanged in 1Q24 vs 4Q23 at c.14%). We do not discount the possibility of the DC job extending into 1Q25 (from 3Q24 initially).
  • Valuation. We revise our target P/E to 20.5x (from 18.5x), pegged to our FY25F EPS to reflect SCGB’s position to secure more DC jobs in Johor and Selangor, after securing MYR2.8bn worth of DC contracts (which were absent during the CY17 construction upcycle, when it traded at 18.5x P/E). Long-term catalysts are Sunway’s (SWB MK, BUY, TP: MYR3.53) hospital expansion plans across Penang, Kelantan, and Iskandar Puteri. The net effect of such adjustments is our new MYR3.81 TP (includes a 6% ESG premium).
  • The stock is trading at 19x FY25 P/E, 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 peers’, and it will potentially benefit from the Johor-Singapore Special Economic Zone via Sunway City Iskandar Puteri. Our estimates have yet to impute the Song Hau 2 power plant project which may boost its orderbook by c.MYR6bn and raise FY24-26F earnings by 8- 17% if the project commences from 1H24, and financial close is obtained.
  • Key risks: Project delays and a prolonged period of high material costs.

Source: RHB Research - 21 May 2024

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