Highlights

• 4Q16 down YoY and QoQ. In 4Q16, domestic contract awards to listed contractors amounted to RM6.8bn (-43% QoQ, -9% YoY). The steep QoQ decline was due to a high base witnessed in 3Q16 at RM11.9bn due to the award of 5 Pan Borneo Highway (PBH) contracts totalling RM6.9bn. The -9% YoY decline was due to a fall in the absolute number of contracts awarded (35 to 27), partially offset by a higher average contract value (RM212m to RM250m).

• 2016 ends a record year. For the full year 2016, domestic contract awards summed to a record RM56.4bn. This translates to (i) a robust +158% YoY growth and (ii) surpassed the previous full year high of RM28bn in 2012.

• Boost from MRT and highways. Upon dissecting the data (Figure #3), we note that the strong showing for 2016 was due to the MRT2 at RM24.3bn (43%) with the tunnelling works (RM15.5bn) being the single largest contract awarded. Apart from that, the PBH made up RM10bn (18%) while other major highways contributed RM7.6bn (13%).

• Normalisation for 2017. Given the significantly higher base achieved in 2016, it would only be rational to expect a downward normalisation this year. For 2017, we expect domestic contract flows to come in at RM25bn. While this would be down -56% YoY, it is in between the levels posted in 2012 (RM28bn) and 2015 (RM22bn) which were still relatively good years for job flows.

• What’s in store? Expected mega projects for 2017 include remaining packages of the MRT2 (RM5bn) in 1H, LRT3 (RM9bn) awards to begin in 1Q and potentially the mammoth ECRL (RM55bn) towards end 2017 at earliest.

• Lower foreign contracts. Foreign contract awards in 4Q16 were almost non-existent at RM52m, bringing the full year sum to RM1.4bn (-54% YoY). The YoY decline in foreign contracts was expected as most contractors were busy with the ample domestic jobs available.

Risks

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

Rating

Maintain OVERWEIGHT

• While we expect a downward normalisation in job flows for 2017, we retain our OVERWEIGHT rating on the sector. Following the strong job wins in 2016, most contractors are sitting on an all-time high orderbook which should translate to strong earnings delivery this year.

Top Picks

• Gamuda (BUY, TP: RM5.67) is our top large cap construction pick as it is set to see an earnings revival in FY17 and potentially hitting a new high in FY18.

• For the small caps, we like GKent (BUY, TP: RM3.77) and Pesona (BUY, TP: RM0.81) as they both offer superior earnings growth, strong ROEs and net cash positions.

Source: Hong Leong Investment Bank Research - 4 Jan 2017