Highlights

• Hitting the roof. Domestic contract awards to listed contractors in 1Q16 came in at a robust RM29.7bn, increasing by 6-folds YoY and 3-folds QoQ. This is the strongest quarter ever recorded, which is more than double that of the previous quarterly high in 2Q12 (RM13.2bn).

• Already a record year. Based on 1Q data alone, 2016 is already a record year for job flows. To put things into perspective, 1Q contract awards has al ready surpassed the previous full year high of RM28bn in 2012.

• MRT2 leads the way… Of the RM29.7bn worth of job flows in 1Q, RM15.5bn (52%) came from the MRT2 underground works awarded to the MMC-Gamuda JV. Note that 1Q job flow numbers do not capture the MRT elevated packages awarded to AZRB (RM1.4bn) and SunCon (RM1.2bn) as the official Letter of Award was only issued earlier this month.

• …while Pan Borneo kicks o ff. The Pan Borneo Highway (PBH) saw 2 packages awarded to the Zecon-Kimlun JV (RM1.5bn) and Hock Seng Lee-DMIA JV (RM1.7bn).

• Other notable contracts. These include (i ) Setiawangsa- Pantai Expressway (RM3.7bn) to Ekovest, (ii) affordable housing in Kuching (RM761m) to Zecon, (iii) Kuching Wastewater System (RM750m) to Hock Seng Lee and (iv) UiTM teaching hospital in Puncak Alam (RM599m) to TRIplc.

• Looking ahead. Job flows in 2Q16 are likely to see a QoQ decline given the high base in 1Q but should continue to register growth YoY. Major jobs expected this year include remaining 8 elevated packages (RM8bn) of the MRT2, remaining 8 packages (RM8-10bn) of the PBH, LRT3 (RM9bn), SUKE (RM4bn) and DASH (RM4bn). All in all, we reckon there is a good chance that job wins for 2016 could amount to a staggering RM50bn.

• Less focus overseas. Foreign contracts for 1Q16 stood at an insigni ficant RM295m, down -85% YoY and -49% QoQ. This is unsurprising as most contractors are focusing domestically given the abundance of job prospects.

Risks

• A space to watch out for is the softening domestic property market, leading to slower private sector contracts.

Rating

• Maintain OVERWEIGHT
• Our investment thesis is simple: Stay OVERWEIGHT on construction as 2016 will undoubtedly be a record year for contract flows.

Top Picks

• We highlight IJM (BUY, TP: RM3.82) and Gamuda (BUY, TP: RM5.65) as our large cap sector picks. The potential inclusion of both stocks to the FBMKLCI in June is an added catalyst over the short term.
• Within the small-mid cap space, we like WCT (BUY, TP: RM2.15) given its expected earnings rebound backed by strong job wins and Mitrajaya (BUY, TP: RM1.98) for its strong earnings growth at undemanding valuations.

Source: Hong Leong Investment Bank Research - 6 Apr 2016