• Still BUY and MYR5.50 TP, 32% upside and c.3% FY25F yield. Post meeting, we remain upbeat on Sunway Construction’s prospects. We still view FY25F to be a supercharged year (earnings projected to grow at c.53%) – underpinned by higher recognition from a mix of data centre (DC) jobs coupled with potential DC wins with around 766.9MW of IT supply of DCs committed in Malaysia according to DC Byte. This translates to MYR29-34bn of estimated construction value based on the construction cost of USD8.5- 10m per MW in Malaysia based on Arizton.

• SCGB’s tenderbook expanded to MYR13.7bn as of end 2Q24 compared to MYR9.4bn as of end 1Q24. We understand that the increase in tenderbook mostly comes from DC-related jobs while the group is also the in the midst of entering into bids for semiconductor-related facilities space (which SCGB has yet to clinch any jobs from). The group’s focus will not be much on warehousing facilities as DC and semiconductor jobs tend to fetch healthier margins which are slightly higher than the aggregated PBT margin of 5-8%.

• Job prospects and strategy. With MYR3.5bn worth of new jobs YTD-FY24, we view our job replenishment target of MYR4.5bn as a reasonable target with more hyperscale DC providers entering Malaysia. In the grand scheme of things, SCGB plans to cement a solid reputation with current clients via ongoing jobs, of which some are major US-based technology multi-national corporations (MNCs), and later secure jobs for subsequent upsizing of DC facilities – which has occurred in the case of Yellowwood Properties in Sedenak Tech Park (STeP) for the JHB1X0 DC.

• Manpower management. Labour supply is not much of an issue for SCGB as a sizeable amount of internal jobs from its parent is slated to end in 4Q24 namely Sunway Belfield, Sunway Velocity 2B and Sunway Medical Centre Ipoh (including variation orders). Assuming that the manpower from these jobs can be solely used for new jobs (particularly DCs) – SCGB has room to take up c.MYR1.2bn worth of fresh contracts, in our view.

• No changes to our earnings estimates but we flag upside risks which may stem from faster-than-expected billings, particularly for the JHB1X0 DC in STeP (worth MYR3.2bn) – targeted for full completion by 1Q26. Hence, our TP of MYR5.50 (derived via pegging the FY25F EPS to an unchanged target P/E of 27x) remains to reflect the breadth of industrial jobs like DCs (some from major MNCs) which can weather risks of not securing public infrastructure jobs. Our TP also bakes in a 6% ESG premium.

• The stock is currently trading at a 21.7x FY25F P/E, a premium from the Bursa Malaysia Construction Index’s 10-year mean of 13x. We think this is justified given SCGB’s ROE which is significantly higher than its peers and a plethora of catalysts such as securing semiconductor-related contracts and infrastructure ones such as the Penang Light Rail Transit.

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

Source: RHB Research - 26 Aug 2024