• Maintain BUY and MYR5.50 TP, 24% upside with c.3% FY25F yield. Sunway Construction’s 9M24 core net profit of MYR98.3m (+2.3% YoY) accounts for 61% and 56% of our and Street full-year projections. However, we view results as in line as we envisage a stronger 4Q24, backed by greater progress of its jobs for data centres (DC) and Sunway (SWB MK, BUY, TP: MYR5.00). While SCGB may record lower earnings in FY24, we believe FY25F will likely be a supercharged year (53% growth) – underpinned by stronger revenue recognition from a mix of DC jobs (c.50% of outstanding orderbook).

• The construction arm’s PBT surged by 65% YoY in 3Q24, with a stronger margin of 8.2% (3Q23: 7%) amid accelerated progress of ongoing projects (particularly DCs). Meanwhile, its precast segment recorded a 3Q24 PBT of MYR2m vs MYR6.5m in 3Q23, due to higher contributions from projects nearing completion a year ago.

• Orderbook update. SCGB’s construction orderbook as of end-3Q24 stood at c.MYR7.1bn (end-3Q23: MYR5.8bn), with MYR4bn orders secured (vs our FY24 target of MYR4.5bn). The company has MYR10.6bn worth of active tenders comprising DC, warehousing and semiconductor facilities.

• We make no changes to our earnings estimates as we deem results to be in line. This is premised on better progress in 4Q24 for its first package for the JHB1X0 DC job in Johor worth MYR1.7bn. The first package of JHB1X0 had a 36.5% completion rate as of end-3Q24, compared with progress of just 14.1-14.7% from end-4Q23 to end-2Q24 (Figure 2). Hence, our TP of MYR5.50 remains put – derived by pegging FY25F EPS to an unchanged target P/E of 27x to reflect the breadth of industrial jobs it has (especially DCs). Such jobs have shorter turnaround times and higher margins vs normal building and infrastructure contracts. Our TP also bakes in a 6% ESG premium as SCGB’s ESG score is three notches above the country median.

• The stock is trading at 23x FY25P/E, which is at a premium from Bursa Malaysia Construction Index’s 10-year mean of 13x. We think this is justified – as SCGB’s ROE is significantly higher than its peers’, and it is set to benefit from catalysts such as securing semiconductor-related jobs (it has yet to clinch any) and infrastructure contract wins, eg the Penang International Airport expansion and Segment 2 of the Penang LRT Mutiara Line.

• In the longer run, SCGB is likely to benefit from the Johor-Singapore Special Economic Zone via Sunway City Iskandar Puteri. This is on top of parent company Sunway’s hospital expansion plans across Penang, Kelantan and Iskandar Puteri, as well as its intention to build an education campus in Ipoh in the future.

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

Source: RHB Securities Research - 22 Nov 2024