Sunway Construction Group Bhd (SunCon) is in a sweet spot to benefit from Johor-Singapore Special Economic Zone (JS-SEZ) from various angles, from industrial buildings to renewable energy (RE), according to RHB Investment Bank (RHB IB).
“We still favour and even without the JS-SEZ prospects, backed by Mass Rapid Transit 3, reinstatement of Light Rail Transit (LRT) 3 stations, and Penang LRT.
“The financial close of Song Hau 2 power plant, which is expected to be by the end of 1H24 may add RM6 billion to its orderbook. Its latest orderbook is RM5.8 billion,” it said in its Company Note today (Jan 12).
Consequently, the research house keeps its buy call with a new TP of RM2.42 from RM2.22, 11% upside and 3% FY24F yield.
However, it said that there are no changes to its earnings estimates.
“We are adjusting our target P/E (pegged to our FY24F EPS) to 18.5x from 17x. As such, we arrive at a new TP of RM2.42 after imputing a 6% ESG premium based on our proprietary ESG scoring methodology.
“We believe this target P/E (which is above its 5-year mean P/E of 16x) is justified as SunCon was trading near around 18.5x during the mid-2017.
“Moreover, the stock’s 17.8x FY24F P/E is below the target P/E. Additional catalysts could be SunCon’s potential participation in the Johor Bahru LRT, which we view as likely given its current RM605 million contract for the JB-Singapore Rapid Transit System (RTS) Link,” it said.
Meanwhile, the key risks of its call are project delays and a prolonged period of high material costs.
On JS-SEZ, it said that market speculation is rife on the exact location of the zone – either in Kulai which houses the Sedenak Tech Park (STeP) or somewhere near the Tuas Link.
“Should the JS-SEZ be situated near the Second Link, we may likely see spillover effects on the Sunway City Iskandar Puteri (SCIP), which has a gross development value (GDV) of RM30 billion with 1,770 acres of land near the Second Link and subsequently, towards SunCon.
“The group has completed RM1.7 billion worth of projects in Johor with RM900 million jobs in SCIP. Assuming the JS-SEZ is in Kulai, it already has a foothold in places like STeP via the RM1.7 billion data centre project it secured in December 2022,” it said.
Moreover, RHB IB said renewable energy (RE) initiatives mentioned in the memorandum of understanding (MoU) of the JS-SEZ could likely spell opportunities from the engineering, procurement, construction and commissioning (EPCC) of solar plants, in its view.
SunCon has secured RM500 million of EPCC contracts for solar projects.
“Solar energy prospects could be further backed by Malaysia’s move to reverse the policy of banning exports of RE to Singapore,” it said.
The research house said even putting the JS-SEZ factor aside, Singapore real estate group, Equalbase will jointly develop an RM8 billion carbon neutral logistics hub with Sunway Bhd (SWB MK, BUY, TP: RM3) in a free commercial zone within SCIP.
“Aside from residential and retail premises – SunCon was previously involved in industrial projects in Johor such as the RM121 million job for the Bio-Xcell plant.
“SunCon has strengthened its muscle for industrial jobs in general after securing the RM298 million, with 50% effective share via SunCon-Kajima (Malaysia) Sdn Bhd joint venture (JV) from Daiso Malaysia Group for a global distribution centre warehouse in Pulau Indah, Selangor.
“Therefore, we view the group to be eyeing projects under the said RM8 billion carbon neutral logistics hub,” added RHB IB.
