Highlights

• Higher QoQ but lower YoY. Domestic contract awards to listed contractors in 3Q17 amounted to RM7.7bn (+90% QoQ, -35% YoY). The strong QoQ increase was due to (i) low base in the previous quarter (2Q) which saw an absence of mega contracts as the MRT2 contracts have been largely dished out but LRT3 awards have yet to commence and (ii) boost in 3Q from the award of LRT3 contracts. On the other hand, the YoY decline was expected given the high base in 3Q16 coming from various mega contracts such as the Pan Borneo Highway (PBH) Sarawak (RM6.9bn), SUKE (RM1.6bn) and MRT2 track works (RM1bn).

• Notable contract awards. 3Q17 witnessed the award of 2 sizable LRT3 contracts totalling RM1.6bn to WCT and TRC. There were also several large building jobs such as (i) PPA1M apartments (RM582m) to SunCon, (ii) Cyberjaya Hospital (RM475m) to Gadang, (iii) UOB Tower 2 (RM451m) to IJM and (iv) Vertu Resort (RM442m) to Kerjaya Prospek.

• Downward normalisation. Cumulative 9M17 domestic job wins totalled RM18.4bn, falling 63% YoY amid a high base last year. To recap, same period last year saw several large scale awards such as the MRT2 (RM22bn), PBH Sarawak (RM6.6bn) and several highways (RM6.1bn). We expect contract flows of in 4Q to mirror that of 3Q, which would bring total job wins in 2017 to c.RM25bn. Job flows in 4Q are likely to be driven by more LRT3 contracts, in our view.

• Mega rail jobs. We have identified RM161bn worth of mega rail projects that will be rolled out over the next 1-2 years which are the ECRL (RM55bn), HSR (RM57bn), MRT3 (RM40bn) and Southern EDT (RM9bn). We estimate that in totality, c.50% of these contracts will be accorded to local contractors in value terms.

• Absence of foreign contracts. Foreign contract awards were almost non-existent in 3Q17 at RM35m, bringing the cumulative 9M17 sum to RM1.1bn (-16% YoY).

Risks

• Soft property market will hamper job flows from private sector.

Rating

Maintain OVERWEIGHT

• We expect a strong revival in job flows next year, driven by the above-mentioned mega rail projects. The significance of these rail jobs to the construction sector should not be underestimated. To illustrate, job wins hit a high of RM28bn in 2012 and RM56bn in 2016 when the MRT1 and MRT2 were rolled out.

Top Picks

• Our top picks are centred on the upcoming influx of mega rail projects. We favour Gamuda (BUY, TP: RM6.36) given its strong track record with civil rail projects (Northern Double Track, MRT1 and MRT2). We also like GKent (BUY, TP: RM3.75) as the only local player with an expertise in rail related systems.

Source: Hong Leong Investment Bank Research - 9 Oct 2017