2Q18 domestic contract awards totalled RM4.1bn (-10% QoQ, +2% YoY), bringing 1H18 sum to RM8.7bn (-18% YoY). The QoQ decline was mainly due to the change in federal government post 14GE as the new administration embarked on a review of all mega projects. The HSR and MRT3 have been scrapped while ongoing projects such as ECRL, MRT2 and LRT3 are under review in terms of cost structure. As such, we expect 2018 contract awards to end at RM15bn, a steep decline from 2017 (RM29bn) and 2016 (RM56bn). Maintain NEUTRAL on construction sector.

Slowing after GE14. Domestic contract awards to listed contractors totalled RM4.1bn in 2Q18 (-10% QoQ, +2% YoY). The QoQ decline was mainly due to the change in federal government post 14GE as the new administration embarked on a review of all mega projects. Sizable job wins were lacking during the quarter with only 1 contract exceeding RM400m (Kuantan sewage treatment plant and pipe network). In comparison, contract awards in 1Q18 (RM4.6bn) and 4Q17 (RM10.9bn) were boosted by the remaining packages of LRT3 and MRT2. For the cumulative 1H18 period, domestic contract awards totalled RM8.7bn, decreasing 18% YoY. Surprisingly there were zero foreign contract awards in 2Q, bringing 1H18 sum to RM149m (-87% YoY). Going forward we do not discount the possibility that more contractors will bid for foreign jobs following the slowdown in the domestic construction landscape.

Steep decline this year. The HSR (RM60-70bn) and MRT3 (RM40bn) were scrapped while ECRL (RM60bn) is being renegotiated to reduce its cost. It was also reported that ongoing projects such as MRT2 (RM32bn) and LRT3 (RM12bn) may be re-evaluated to try and reduce its cost. Based on our estimation, about RM105bn worth of local content of mega projects will be removed over the next 2 years following the review. As such, we expect 2018 contract awards to end at RM15bn, a steep decline from 2017 (RM29bn) and 2016 (RM56bn).

Maintain NEUTRAL. Maintain NEUTRAL on construction post changes in federal government and scrapping of mega rail projects. The domestic construction industry landscape is expected to remain challenging and we do not expect a significant improvement in the near term. Nonetheless, high orderbook levels (average cover ratio of 4.9x) following the robust job flows in the past 2 years should help sustain construction earnings amid subdued near term industry prospects.

Source: Hong Leong Investment Bank Research - 4 Jul 2018