Investment Highlights

• Upgrade to OVERWEIGHT from NEUTRAL, premised on the potential recovery of job flows in 2H2023 and stabilising operating margins. Although MRT3 may be downscaled, the award of the projects would still support improving growth prospects for the sector. Top Buys are Gamuda and SunCon. However, we may downgrade the sector if (i) margins are compressed on higher-than-expected construction costs; (ii) slower-than-expected recovery in job flows; and/or (iii) mega projects are shelved.

• Expect MRT3 awards in 2H2023. Upon the completion of the study on the proposed alignment and suitability of realignment, MRT Corp will conduct a public inspection of the MRT3 railway scheme for a period of 3 months. As the government seeks to reduce the cost of the project, we think a major realignment of MRT3 is unlikely. Notwithstanding the realignment, we believe a fresh tender is not necessary. Hence, we expect the tender awards of the main packages and subcontracts to materialise in 2H2023. We believe the front runners for the awards are Gamuda, IJM and SunCon.
  Currently, the 3 work packages are CMC301 (5.8km elevated), CMC302 (28km elevated and 0.7km underground) and CMC303 (6.3km elevated and 10.1km underground).

• Job flow recovery expected in 2H2023. According to the Construction Industry Development Board (CIDB), YTD contracts awarded up to Mar 2023 were RM19.7bil (Government: 19%; Private 81%), 40% lower than the RM32.7bil (Exhibit 4) in the same period last year. Nonetheless, we expect a recovery in job flows in 2H2023. Property developers also intend to accelerate launches in CY23F in light of the stabilisation of building material prices and easing of labour shortages.

• Flood mitigation projects above RM600mil to commence in June 2023. According to the PM, 6 flood mitigation projects would be re-tendered by June 2023. Following the floods in Johor, those that are above RM600mil will be expedited and commence as early as June 2023. Potential beneficiaries include Gamuda and IJM.

• Potential revival of the HSR project. During the Invest Malaysia 2023 conference early last month, the government revealed that the KL-Singapore High-Speed Rail (HSR) may continue if it is funded by the private sector. The government is currently undertaking requests for information (RFI) for the project. While revival is on the cards, we think that it is unlikely in the near term. To recap, the project, estimated to cost RM60bil in 2020, was shelved in 2021.

• Stabilising operating margins. Steel prices rose 7% to RM2,864/tonne in Feb 2023 from the low of RM2,686/tonne in Nov 2022 (Exhibit 5) while bagged cement prices in Central Peninsular rose to RM19.23/50kg – 8% higher than RM17.83/50kg bag in Jan 2021 (Exhibit 6).
  Looking ahead, we think the upward pressure on steel prices may continue as China’s economic growth outperforms and supports industrial metal demand. Meanwhile, a multi-tiered levy for the migrant workforce will be introduced in 2023F, which may result in higher labour costs.
  Nevertheless, we believe contractors can incorporate the rising costs for new tenders in the form of increased contract values or negotiate for a cost variations.

Source: AmInvest Research - 7 Apr 2023