Highlights

• Notable contracts. Some of the sizable contract wins in 2Q include (i) retail podium in Pusat Bdr D’sara (RM703m) to Malton; (ii) University Malaysia Sabah Teaching Hospital (RM653m) to Melati Ehsan and; (iii) West Coast Expressway subcontract (RM499m) toWZ Satu.

• On track to match last year. On a cumulative basis, 1H domestic contracts totalled RM8.8bn, a strong +53% YoY increase. 1H numbers made up 57% of our full year target (RM15bn) and 49% of the RM17.9bn recorded in 2014. With the strong showing in 1H, we reckon there is a good chance that 2015 job wins will surpass our target, possibly matching that of last year.

• What’s installed for 2H? Potential job flows in 2H include the LRT3 (RM9bn), certain stretches of the Pan Borneo Highway (RM27bn), KL118 (RM3bn), WCE open tender portion (RM2bn) and Kwasa D’sara civil works (RM1bn). 

• Lower for foreign jobs. Foreign contract awards in 2Q stood at RM516m (-34% YoY, -74% QoQ). The steep QoQ decline was due to the high base effect in 1Q15 resulting from the Lusail project in Qatar (2 contracts worth RM1.5bn). Despite the slow 2Q, cumulative 1H foreign contract of RM2.5bn is still up 86% YoY (supported by strong 1Q).

Risks

• A space to watch out for is the softening domestic property cycle, leading to slower private sector contracts as developers scale back on launches.

Rating

• OVERWEIGHT

• Our data on contract awards validates that the momentum of job wins remains strong for contractors. The 11MP  tabled in May) witnessed a 13% allocation increase to RM260bn which will help sustain the flow of contracts for the next 5 years (2016-2020). This anchors our OVERWEIGHT stance on the construction sector.

Top Picks

• For the large caps, IJM (BUY, TP: RM8.00) is our top pick given its strong job wins in FY15 (FYE: Mar) which has ballooned its orderbook to an all-time high RM6.5bn (6.8x cover ratio).

• Amongst the small caps, we continue to advocate buying into Mitrajaya (BUY, TP: RM2.92) which boasts superior earnings growth with 3 year CAGR of 24%, underpinned by its RM1.8bn orderbook (4.7x cover ratio).

• Eversendai (BUY, TP: RM1.55) is another small cap stock  that we like as it offers investors earnings recovery (3 year CAGR: 45%), a record high orderbook with surging job wins and exposure to the thematic strengthening US dollar play.