4Q18 domestic contract awards totalled RM4.0bn (-30% QoQ, -64% YoY), bringing 12M18 sum to RM18.3bn (-37% YoY). Contract flows continue to slow down after a brief rebound in 3Q18 as the Government reprioritises major infrastructure projects. Foreign contract awards amounted to RM148m in 4Q18 (+36% QoQ, -90% YoY) all coming from piling works contracts in Singapore. This indicates that civil infrastructure projects remain robust in Singapore and going forward, we expect more domestic contractors to bid for jobs in Singapore given its geographical proximity. Industry players are aiming for jobs in Sarawak as emphasis will be put on state water and rural road projects and funding will be coming from state reserves which amount to c.RM31bn. Maintain NEUTRAL on construction sector.

Continues to slowdown. Domestic contract awards to listed contractors totalled RM4.0bn in 4Q18 (-30% QoQ, -64% YoY). Contract flows continue to slow down after a brief rebound in 3Q18 as the Government reprioritises major infrastructure projects. We expect continued slowdown in contract awards going forward as development expenditure for 2019 is forecast to decline slightly to RM54.7bn (-0.4% YoY). For the cumulative 12M18 period, domestic and foreign contract awards amounted to RM18.3bn and RM406m respectively, decreasing 37% and 85% YoY.

Compete for jobs in neighbour. Foreign contract awards amounted to RM148m in 4Q18 (+36% QoQ, -90% YoY), all from piling works contracts in Singapore. This indicates that civil infrastructure projects remain robust in Singapore and going forward, we expect more domestic contractors to bid for foreign jobs especially in Singapore given its geographical proximity and also continued slowdown in the domestic construction landscape. Contractors under our coverage that are expected to compete for jobs in Singapore are Gamuda, Kimlun and SunCon.

Mainly smallish jobs for 2019. We expect smallish basic infrastructure projects such as road upgrading, hospital, water, sewerage and rural area development projects will be rolled out by government this year which we believe is insufficient to spark any enthusiasm back towards the sector. However we do not discount potential events such as award of Phase 2 of Klang Valley Double Track project (RM5bn) and news flow on ECRL (possible revival) and Pan Borneo Sabah could alleviate the pessimistic sentiment towards the sector.

Sarawak the next place to be. Job flows in Peninsular Malaysia slowed down significantly following the change in Federal government. We understand that industry players are aiming for jobs in Sarawak as Sarawak Chief Minister mentioned emphasis will be put on state water and rural road projects following the decision to shelve Kuching LRT project. Funding for those projects is expected to come from Sarawak state reserves (c.RM31bn) which insulate the projects from risk of reduction of federal government spending. The Sarawak Coastal Road and Second Trunk Road projects with estimated combined value of RM11bn are expected to open for bidding in the near term.

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. The 37% decline in domestic contract awards in 2018 supports our view. Nonetheless, high orderbook levels (average cover ratio of 4.5x) following the robust job flows in the past 2 years coupled with rock bottom valuation (0.5x price to book ratio) should cushion further downside amid subdued near term industry prospects.

Source: Hong Leong Investment Bank Research - 3 Jan 2019