1Q19 domestic contract awards totalled RM4.8bn (+20% QoQ, +4% YoY). Job awards increased mainly due to resumption of major infrastructure projects after being reviewed by government. Recent positive news flow signified that the worst could be over for the construction industry. Industry players are aiming for jobs in Sarawak as state government has allocated c.RM9bn for development expenditure under state budget 2019 which is the biggest in the history of the state. Foreign contract awards amounted to RM615m in 1Q19 (+315% QoQ, +313% YoY), mostly from marine bridge contracts secured by Gamuda in Taiwan. We expect more domestic contractors to bid for foreign jobs given the continued slowdown in the domestic construction landscape. Maintain NEUTRAL on the construction sector.

Recovery of job flows. Domestic contract awards to listed contractors totalled RM4.8bn in 1Q19 (+20% QoQ, +4% YoY). Job awards increased healthily QoQ mainly due to resumption of major infrastructure projects after being reviewed by the government. To recap, project costs of LRT3 and MRT2 were reduced by 47% (to RM16.63bn) and 22% (to RM30.53bn) respectively. We note that most of the contracts awarded in 1Q19 were mostly small to mid-sized ones (i.e. <RM500m). Notable domestic contract wins during the quarter include construction of TNB campus (Suncon; RM781m), construction of 3 blocks of apartments in KL (Pesona Metro, RM409m) and SUKE package CA2 (MRCB, RM323m).

Worst is over. Although we do not expect the domestic construction industry prospects to go back to where it was during the period of pre-GE14, we opine that the worst is over for the industry. Signs of recovery are (i) completion of costs review and resumption for some mega infrastructure projects; (ii) revival of 121 infrastructure projects (RM13.9bn) offered through direct negotiations and limited tenders by the previous government after cost review; (iii) potential revival of ECRL in near term and (iv) approval of high-impact projects under mid-term review of 11th Malaysia Plan such as Kulim airport (RM1.6bn), logistics and manufacturing hub in Sidam (RM300m) and construction of Phase 1A and 1B of the Northern Corridor Expressway (RM1.7bn).

Sarawak the next place to be. Job flows in Peninsular Malaysia slowed down significantly post GE14. We understand that industry players are aiming for jobs in Sarawak as state government has allocated c.RM9bn for development expenditure under state budget 2019 which is the biggest in the history of the state. Funding for those projects is expected to come from Sarawak’s state reserves (c.RM31bn) which may insulate the projects from risk of reduction of federal government spending.

Significance of foreign jobs. Foreign contract awards amounted to RM615m in 1Q19 (+315% QoQ, +313% YoY), mostly from a marine bridge contract secured by Gamuda in Taiwan. We expect more domestic contractors to bid for foreign jobs given the continued slowdown in the domestic construction landscape. Contractors under our coverage that are expressed interest to compete for foreign jobs are Gamuda, Kimlun, SunCon, IJM and GKent.

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, decent orderbook levels (average cover ratio of 2.9x) following the robust job flows in the past 2 years coupled with recent positive newsflow signifies that worst is over for the industry.

Source: Hong Leong Investment Bank Research - 3 Apr 2019