Highlights

• Tracking contract awards. To better gage the momentum of construction job flows , we trac ked the contract awarded to listed contractors based on their respective announcements made on Bursa.

• Ending with a bang. In 4Q14, domestic contract awards posted a strong showing at RM9.7bn (+100% YoY, +296% QoQ). This strong showing both YoY and QoQ was due to the presence of various sizable contracts such as the WCE (RM2.8bn), Sg Langat sewerage plant (RM1.5bn) which also includes a RM470m subcontract, Ikano Mall (RM652m) and Balingan power plant (RM493m).

• Exceptionally strong Dec. The month of Dec witnessed exceptionally strong job flows at RM5bn. This made up 52% of the domestic contracts in 4Q14 and 28% for the full year. The sudden pick up in Dec was possibly due to the expediting of awards before the year end.

• Finishing higher. For the full year 2014, domestic contracts totalled RM17.9bn (+16% YoY). Excluding 2012 (which had an exceptional boost from the MRT), 2014 posted the highest level of awards since 2009.

• What’s ahead? We expect domestic contract awards to moderate to RM15bn this year before picking up onc e again in 2016 when the MRT Line 2 kicks off. Key projects for 2015 include Warisan Merdeka (RM3bn), LRT 3 (RM9bn), WCE open tender portion (RM2bn), SUKE (RM4bn), DASH (RM4bn), Kuantan Port extension (RM1bn) and civil works for Kwasa Damansara (RM1bn).

• Foreign contracts up too. Foreign contract awards for 2014 stood at RM2bn, increasing 71% YoY and contributing 10% to overall contract awards. The flow of foreign contracts tends to be very volatile.

Risks

• Spending risk. The weak crude oil price environment has raised c oncerns that development expenditure may be cut (originally projected at +15% YoY). The downside to this is largely mitigated via savings from the removal of fuel subsidies. The impact on a development expenditure cut on mega projects should also be minimal as they are mostly carried “off balance sheet”.

Rating

OVERWEIGHT

• Our data on contract awards indicates that job flows remain robust. We retain our OVERWEIGHT rating premised on (i) surge in development expenditure for 2015, (ii) the roll out of new mega projects and (iii) unveiling of the 11MP in May.

Top Picks

• Gamuda (BUY, TP: RM5.67) is our top pick amongst the large cap contractors. The roll out of MRT line 2, news flow on the Penang Trans port Masterplan and resolution to the Selangor water saga are key catalysts.
• For the small caps, we like Mitrajaya (BUY; TP: RM1.52) which sits on a strong orderbook cover of 7x coupled with growing property contribution. The mark et has also overlooked the value of its landbank.

Source: Hong Leong Investment Bank Research - 7 Jan 2015