• Keep BUY with MYR2.07 TP, 24% upside and c.5% FY23F yield. We expect Sunway Construction’s 4Q22 core net profit to increase 30-50% QoQ and reach MYR35-40m backed by improved labour supply and operating conditions. This would translate to a FY22 earnings growth of >20%. Aside from venturing into data centres that are gaining traction, further earnings upside may come if SCGB takes on the job as an EPC contractor for a power plant in Vietnam (effective contract value of MYR6bn to SCGB). Key risks include labour shortage and failure to secure new jobs.

• Orderbook update. We estimate SCGB’s outstanding orderbook MYR5.5- 6.0bn after taking into account the MYR1.7bn job win in Dec 2022 for the data centre in Johor – which translates into an orderbook-to-revenue cover ratio of 3.2-3.5x – higher than the peer average ratio of c.3x. We view the data centre job in Johor to be an impetus for earnings growth amid better PBT margins of c.8% and larger earnings recognition spread over a shorter period of 21 months compared to its normal construction jobs of MYR200- 300m that are billed over two to four years on average. We also gathered that there are also some data centre jobs under SCGB’s tenderbook size of >MYR10bn which likely includes jobs such as the Johor Bahru – Singapore Rapid Transit System Link.

• Labour supply update. As SCGB plans to venture into data centre jobs with shorter timelines, we draw comfort from SCGB’s incoming foreign labour supply. In Nov 2022, SCGB received 342 of the 400 foreign workers approved, with the remainder likely to have arrived by now. We believe the month of Dec 2022 could see higher activity levels at work sites. SCGB also applied for another 600 foreign workers (likely to be approved in 1Q23). If this application is approved, SCGB’s total foreign worker manpower would stand at c.1,000 workers vs c.800 workers (pre-pandemic period).

• Outlook. We consider SCGB’s move to bid for data centre or industrial- related jobs to be strategic. Such move may mitigate the risks of slow job replenishments from public infrastructure projects, ie Mass Rapid Transit (MRT3) that may likely be subject to cost review. For context, 8% of SCGB’s outstanding orderbook came from infrastructure/piling jobs as at end Sep 2022 vs >40% as at end Dec 2018. Meanwhile, its precast segment is expected to be supported by launches of Singapore’s Housing and Development Board (HDB) flats with 23k HDB flats slated to be launched in 2023 according to Singapore’s HDB. Recall that >90% of SCGB’s precast revenue comes from projects in Singapore.

• We make no changes to our earnings estimates and retain our yearly new job win target of MYR2.5bn for FY23-24F. Therefore, our TP remains at MYR2.07 based on an unchanged 15.5x target P/E pegged to FY23F EPS after imputing a 4% premium to our intrinsic valuation based on our ESG scoring methodology. The valuation target is above the KLCON Index’s 5-year mean of 12x to reflect SCGB’s commendable orderbook/revenue cover ratio of 3.2-3.5x, backed by a lean balance sheet.

Source: RHB Research - 26 Jan 2023