Job flow continue to improve. Cumulative YTD job availability has improved 14.1% YoY, with value of work done as of 1Q2024 growing 14.2% YoY to RM36.8bn from RM32.2bn in 1Q2023. 2H 2024 sector activity could be catalysed by the implementation of high-impact projects such as Bayan Lepas LRT, Pan Borneo Sabah Phase 1B, Sarawak-Sabah Link Road (SSLR) Phase 2, airports and/or ports expansion and redevelopments, LRT 3 reinstatement etc. These anticipated projects are part of the RM90bn development expenditure outlined for 2024.

Muted earnings growth. While construction revenue is expected to improve, earnings growth may continue to remain muted due to elevated building material prices, higher labour and finance cost. Effective from June 10, the price of diesel was raised to RM3.35 per litre, from RM2.15 per litre previously under the implementation of the diesel subsidy rationalisation. Key building materials such as cement, rebar, precast concrete as well as cost of equipment and machinery such as excavators and cranes are expected to rise by 30% following this. Labour and finance cost appears to have stabilised for now, albeit gaining >30% YoY as a result of a higher minimum wage requirement and elevated interest rates. Nevertheless, builders’ associations have appealed and the federal government is reported to be considering including vehicles transporting building materials and cranes into the list of transportation eligible for diesel subsidies.

Sector Valuation. The KL Construction Index (KLCON) is currently trading at 17.0x forward earnings, +2SD above its 5-year average forward PE of 13.2x due to bullish market sentiment amid the hype surrounding data centres and generative artificial intelligence, and strengthening news flows surrounding the implementation of public infrastructure projects.

Lower to NEUTRAL. Following our sector call upgrade end-2022, stocks under our coverage have outperformed respective benchmarks, with Gamuda (+88.9%), IJM Corporation (+103.5%), Kerjaya Prospek Group (+68.2%) and MGB (+56.4%) rising to year-highs. While we expect construction activities to remain relatively healthy in 2H 2024, spurred by the roll-out of high-impact public funded projects and robust private projects driven by new orders for data centres, semiconductor factories and industrial warehouses, we believe that the positives have been largely priced-in following the recent run in share prices. We lower our call to NEUTRAL, though with a positive bias.

Source: PublicInvest Research - 26 Jun 2024