Highlights

• The final leg to Vision 2020. This year marks the beginning of the 11MP which is arguably the most critical Malaysia Plan as it ends in 2020, the target timeline for the country to achieve a “high inc ome nation” status. Allocation for the 11MP is set at RM260bn, a 13% increase from the 10MP.

• Spending still on the rise. Despite the strong 21% jump in development expenditure last year, the allocation of RM50bn (+6% YoY) for 2016 continues to exhibit growth. This is positive given the strong correlation (76%) between nominal construction output and development expenditure.

• Outperformance to continue. Real construction growth has outperformed overall GDP since 1Q12. Our economics team expects the outperformance of construction to persist into 2016 at 10% against a softer GDP growth of 4.5%.

• 2016 to be a record year. Domestic contract awards to listed contractors for 2015 was robust at RM22bn (+20% YoY), the 2nd highest in the past 8 years. In spite of the high base, we expect 2016 to come in even stronger, potentially breaking the previous high in 2012 at RM28bn.

• Mega contracts all year round. We expect 2016 to witness the award of several large scale contracts which will sustain job flows all year round. This should start off with the LRT3 (RM9bn) in 1Q, MRT2 (RM28bn) in 2Q, DASH (RM4bn) and SUKE (RM4bn) in 3Q and potentially the revival of the Southern Double Track (RM8bn) in 4Q.

Risks

• The key risk is a softening domestic property market which may see slower job flows from private sector developers. Nonetheless, we expect this to be more than offset by higher contract awards for Government related infra jobs.

Rating

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Valuation

• OVERWEIGHT
• We retain our OVERWEIGHT rating on construction as there is a very plausible likelihood of 2016 being a record year for contract flows.
• From a P/B perspective, valuations are a bargain with the KLCON trading at 0.9x. The last time the KLCON traded below book was during 2008-2009 Global Financial Crisis.

Top Picks

• IJM (BUY, TP: RM3.86) is our top pick amongst the large cap contractors given its record high orderbook of RM6.7bn which boasts a superior cover ratio of 7.5x. Property weakness will be offset from the privatisation of IJM Land which will clog the MI leakage.
• For the small caps, we like Mitrajaya (BUY; TP: RM1.52) which has a strong earnings CAGR of 24% for FY15-17 and potential to ramp up job wins this year.
• We also highlight SCable (BUY, TP: RM2.57) which should come in flavour this year as a Sarawak election play. Broadly similar to CMS, SCable offers a ticket to Sarawak’s growth theme but at P/E valuations that are 50% cheaper.

Source: Hong Leong Investment Bank Research - 8 Jan 2016