1Q18 domestic contract awards totalled RM4.6bn (-58% QoQ, -31% YoY) with the decline due to last year’s high base (LRT3 and MRT2). We are unfazed by the slow quarter as the pipeline of mega projects is abundant at RM168bn (local content: RM105bn). These include HSR (PDP roles just awarded), Pan Borneo Sabah (this month), MRT3 (2Q18) and ECRL (awaiting subcontracts). KLCON is down 12% YTD which we see as an opportunity to accumulate. Maintain OVERWEIGHT as the rollout of mega rail projects could drive job wins to a new high. Top picks are rail centric: Gamuda (TP: RM5.98) and GKent (TP: RM5.66).

Slow start for job flows. Domestic contract awards to listed contractors totalled RM4.6bn in 1Q18 (-58% QoQ, -31% YoY). The QoQ and YoY decline was attributed to a higher base witnessed last year from the rollout of mega projects such as the LRT3 (in 4Q17) and remaining packages of the MRT2 (in 1Q17). Note that 2017 recorded the 2 nd highest sum of contract awards (RM29.3bn) in the last 10 years, with 4Q17 being the strongest quarter that year. The LRT3 underground package (RM1.1bn) to IJM was the only sizable contract in 1Q18 while all other job wins were below RM400m. Overall, we are unfazed by the weak 1Q18 as the pipeline of mega projects remain abundant and should gain traction in 2Q18.

Timeline on Mega Projects. We have identified RM168bn worth of mega projects over the next 2 years with an estimated local content of RM105bn. The HSR PDP roles (RM40bn) were awarded last week to MRCB-Gamuda and YTL-THP and we expect the work packages to be dished out by year end. As for the AssetsCo role (RM20bn), tender will close in end June. On Pan Borneo Sabah (RM13bn), The Edge reported that 12 packages worth c.RM500m each are expected to be awarded this month. For MRT3 (RM45bn), a decision on the turnkey contractor between MMC Gamuda-GKent JV and CCCC is expected to be made this quarter. On the ECRL (RM55bn), Lafarge (BUY, TP: RM5.65) was recently awarded the cement supply contract (RM270m). We read this is an encouraging sign that the eventual subcontracts for the ECRL could be dished out soon.

Maintain OVERWEIGHT. Stay OVERWEIGHT on construction premised on the rollout of mega rail projects (MRT3, HSR and ECRL) which could possibly drive contract awards to a new high this year. The sell down in construction stocks (KLCON: -11.5% YTD) provides an opportunity to accumulate. Our top picks are centred on the rail theme: Gamuda (civil works) and GKent (system works).

Source: Hong Leong Investment Bank Research - 10 Apr 2018