Highlights

• Started slow but ended strong. In 3Q15, domestic contract awards to listed contractors stood at RM5.7bn (+132% YoY, +23% QoQ). Job flows started out slow during the quarter with only RM958m recorded in July and Aug. Nonetheless, a strong recovery was witnessed in Sept with RM4.7bn posted following some sizable contract awards.

• Chunky contracts dished out. Some of the sizable contracts that were awarded in 3Q include (i) Putrajaya Parcel F buildings (RM1.6bn) to SunCon; (ii) RAPID effluent treatment plant (RM950m) to Muhibbah-VA Tech JV; (iii) RAPID worker’s village and temporary facilities (RM489m) to Mudajaya and; (iv) Equatorial Plaza (RM456m) to IJM.

• Set to match last year. On a cumulative basis, domestic job flows totalled RM14.5bn for the 9M period. While this translates to a robust +77% YoY growth, we do not think that the full year numbers will be signi ficantly higher than 2014 at RM17.9bn. This is due to the high base in 4Q14 (RM9.7bn) which made up 54% of the total contract awards last year.

• 2016 could be a record year. Given the targeted roll out of the MRT Line 2 (RM28bn) and LRT3 (RM9bn) next year, 2016 could potentially be a record year for job flows. Taking cue from the experience of 2012 when the bulk of the MRT Line 1 packages were dished out, cont ract awards soared to an all-time high of RM28bn that year.

• Insignificant foreign contracts. Foreign contract awards were almost non-existent in 3Q15 at an insigni ficant RM42m (3Q14: RM664m, 2Q15: RM516m). We wouldn’t be reading too much into this as (i) Malaysian contractors are not very reliant on foreign contracts and; (ii) the flow of foreign jobs can be very erratic. Despite the weak 3Q15, cumulative 9M numbers for foreign jobs of RM2.5bn is still up 26% YoY.

Risks

• A space to watch out for is the softening domestic property market, 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 witnessed a 13% allocation increase to RM260bn which will help sustain the flow of contracts for the next 5 years (2016- 2020). With domestic contract awards potentially hitting an all-time high in 2016, we retain our OVERWEIGHT rating on the sector.

Top Picks

• For the large caps, IJM (BUY, TP: RM3.92) is our top pick given its record high orderbook of RM6.7bn which implies a superior cover ratio of 7.5x.
• Amongst the small caps, we continue to advocate buying into Mitrajaya (BUY, TP: RM1.95) which boasts superior earnings growth with 3 year CAGR of 24%, underpinned by its RM1.8bn orderbook (4.7x cover ratio).

Source: Hong Leong Investment Bank Research - 8 Oct 2015