In its research report on company update, RHB Research said that it expects Sunway Construction’s (SCGB) financial year 2022’s fourth quarter (4Q22) core net profit to increase 30-50% quarter-on-quarter (QoQ) and reach MYR35-40m backed by improved labour supply and operating conditions. This would translate to a FY22 earnings growth of more than 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).
Orderbook update. It is estimated that SCGB’s outstanding orderbook MYR5.5-6.0 billion after taking into account the MYR1.7 billion 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.
The research house views 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 MYR200-300 million that are billed over two to four years on average. The research house also gathered that there are also some data centre jobs under SCGB’s tenderbook size of more than MYR10 billion 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, the research house draws 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. Hence it is believed 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. RHB Research considers 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, like 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 more than 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 23,000 HDB flats slated to be launched in 2023 according to Singapore’s HDB. Recall that more than 90% of SCGB’s precast revenue comes from projects in Singapore.
RHB Research makes no changes to its earnings estimates and retain its yearly new job win target of MYR2.5 billion for forecast of financial year 2023 -2024 (FY23-24F). Therefore, its target price (TP) remains at MYR2.07 based on an unchanged 15.5x target P/E pegged to FY23F EPS after imputing a 4% premium, 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.
Key risks include labour shortage and failure to secure new jobs.
