Highlights

• Sustaining QoQ but... For 1Q17, domestic contract awards to listed contractors amounted to RM6.6bn. This was relatively flat QoQ at -2% as jobs from the MRT2 continued to flow from 4Q16 (RM2.2bn) into 1Q17 (RM2bn), sustaining the momentum of contract awards.

• …steep YoY fall from a high base. However, on a YoY basis, there was a steep fall of -78% due to the high base in 1Q16 (strongest quarter ever) resulting from the award of the MRT2 underground contract (RM15.5bn). Other sizable contracts that contributed to the high based in 1Q last year were DUKE3 (RM3.7bn), 2 packages of the Sarawak Pan Borneo Highway (RM3.2bn) and Kuching Wastewater System (RM750m).

• Normalisation to set in. Given the significantly higher base for 2016 at RM56bn (all time high), we expect a downward normalisation in 2017 to RM25bn. With 1Q numbers forming 26% of our full year target, we reckon this is on track. Despite the downward normalisation expected in 2017, this remains at the higher end of the historical range from 2009- 2015 of RM10-28bn.

• MRT2 almost done, LRT3 next. All the major MRT2 viaduct packages have been awarded while the station works (7 remaining: c.RM1.5bn) are expected to be dished out from now until 3Q17. For the LRT3 (RM9bn), we expect contract awards to commence from 2Q17 onwards. As for the RM60bn HSR (bilateral agreement signed) and RM55bn ECRL (undergoing public display), we reckon that awards are likely to only commence in 2018.

• Higher for foreign jobs. There were only 2 foreign contract awards in 1Q17 totalling RM483m (QoQ: >8-folds, YoY: +64%) coming off a low base. We do not expect much contribution from foreign jobs as most contractors continue to focus domestically given the abundance of jobs.

Risks

• A space to watch out for is the soft 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

• YTD all our top picks, Gamuda (+9%), GKent (+44%) and Pesona (+21%), have outperformed the KLCI (+6%).

• Gamuda (BUY, TP: RM5.74) 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: RM4.73) 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 - 6 Apr 2017