Investment Highlights

• Japan pulls out of HSR project. Japanese firms have aborted plans to get involved in the KL-Singapore highspeed rail (HSR) project, potentially costing up to RM100bil, connecting Kuala Lumpur and Singapore given the high risks of a private financing structure which does not have the Malaysian government's financial support such as direct public spending or debt guarantees. The project is structured under a design-finance-build-operate transfer model with the asset to be handed over after the concession period. After multiple detours over the decades, MyHSR Corp has called for concept proposals from the private sector to be submitted for the development of the HSR project on 11 July 2023 with today being the deadline for submissions. The Malaysian government is set to narrow down candidates within several months and could start full-fledged negotiations with the Singaporean government later this year. Transport Minister Anthony Loke has said that the HSR project will not be halted by the Japanese companies opting out of the tender process.

• Potential catalyst for positive investor sentiments. We acknowledge that the new Agong together with reenergised excitement in infrastructural and property developments in Johor could catalyse positive investor sentiments for the sector, especially for interested parties such as YTL Corp, Gamuda, IJM Corp, Sunway Construction, MRCB, MMC Corp, WCT Holdings and Berjaya Corp. For a project of this scale, we expect the federal and state governments to be involved in the lengthy and complex land acquisition process. The surrounding lands may be monetised to partly defray the costs of building the railway, stations and facilities. However, we do not discount further hurdles and reviews to this decades-long proposition, which could have additional route realignments before the government has reached final investment decision against the backdrop of escalating construction costs. Hence, for now, we have not factored in this project for any of the companies’ order book replenishment assumptions within our coverage pending greater clarity from the authorities.

• Raise fair values of SunCon, WCT and Econpile. Against the backdrop of rising order book optimism and expectations for reaccelerated infrastructural rollouts, we have raised Sunway Construction’s (SunCon) FV to RM2.66/share (from RM2.17/share previously), pegged to a higher FY24F PE of 20x, 0.5 standard deviation above its 5-year average of 18x. Likewise, we have raised WCT’s FV to RM0.59/share (from RM0.44/share earlier) based on FY24F P/E of 16x, near the average for large-cap construction stocks. For Econpile, we have raised its FV to RM0.28/share (from RM0.12/share) by reverting to its FY24F book value given its lingering losses caused by high operational costs.

• Reiterate OVERWEIGHT rating, premised on a re-energised recovery of job flows in 1H2024 underpinned by a stable government and improving operating margins that are further catalysed by prolific overseas jobs. Our Top BUY is Gamuda (RV: RM6.73) given its proven ability to successfully penetrate new overseas markets to secure open tenders in Australia, Taiwan and Singapore. To date, Gamuda is the only Malaysian contractor to secure major tenders in Australia and Taiwan. Amongst the 6 construction stocks in our coverage, Gamuda has by far the largest order book of RM26bil – 67% of a combined RM41bil, 4.9x SunCon’s RM5.3bil and 5.8x IJM Corp’s RM4.5bil. We also like SunCon (FV: RM2.66) with potential job wins from the finalisation of the Vietnam coalfired power plant, construction of warehouses/data centres and internal building jobs from companies within Sunway group, especially medical centres.

Source: AmInvest Research - 15 Jan 2024