• Still BUY, new MYR4.12 TP from MYR3.81, 24% upside with c.3% FY24F yield. Sunway Construction announced that the value of its data centre (DC) job known as JHB1X0 in Sedenak Tech Park (STeP), Johor has been revised to MYR3.2bn from MYR1.7bn – making it the company’s largest single contract to date. The upward adjustment came from the inclusion of the job scope under the notice to proceed (NTP) 4 works, on top of the balance of the existing NTP 2 and NTP 3 works. NTP 2, NTP3 and NTP 4 works are expected to be completed in 20 months from June onwards.

• Impact on orderbook. With NTP 1 works (estimated at MYR300m) being completed as of 10 Jun, we estimate the remaining works for NTP2 and NTP3 to be valued at c.MYR1.4bn (out of the total initial job value of MYR1.7bn). The inclusion of NTP works brings the balance of works of JHB1X0 to about MYR2.9bn. We estimate that DC jobs now constitute c.MYR3.8bn or 48% of the SCGB’s enlarged outstanding orderbook of MYR7.9bn. With DC jobs taking centrestage, we project that SCGB could comfortably add MYR2-3bn more worth of DC contracts to its existing ones before it needs to fully reassess its overall manpower capacity.

• Post-contract value adjustment for JHBX01 via NTP 4 works. SCGB’s new job wins for FY24F have reached c.MYR3.3bn – the highest since FY17, which saw MYR4bn worth of new jobs clinched. The total value of new job wins YTD has also exceeded our initial assumption of MYR3bn. Since the YTD FY24 job replenishment has surpassed our initial projection of MYR3bn, we are revising our new job wins estimate for this year to MYR4.5bn.

• We now upgrade our FY24-26 earnings estimates by 2%, 8% and 8%. As such, we arrive at a new TP of MYR4.12 (from MYR3.81) – derived by pegging FY25F EPS to an unchanged target P/E of 20.5x (which bakes in a 6% ESG premium). We believe that the target P/E is justified, to reflect SCGB’s position in securing more DC projects in Johor and Selangor. Note that it has already garnered MYR4.3bn worth of DC contracts (which were absent during the last construction upcycle in CY17, when the stock was trading at a P/E of 18.5x).

• The stock’s market valuation is at 17.5x FY25F P/E, which is at a premium to the Bursa Malaysia Construction Index’s 5-year mean of 13x. This is justified, as SCGB’s ROE is significantly higher than that of its peers, and it 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: MYR4.00) hospital expansion plan across Penang, Kelantan and Iskandar Puteri. Meanwhile, a short-term catalyst would be securing a package related to one of the five Light Rail Transit 3 stations being reinstated (likely to cost c.MYR500m).

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

Source: RHB Research - 11 Jun 2024