2Q19 domestic contract awards totalled RM3.4bn (-30% QoQ, -19% YoY), bringing 1H19 sum to RM8.1bn (-7% YoY). The decline in contract awards both QoQ and YoY is mainly due to smaller average contract size of RM115m (1Q19: RM176m, 2Q18: RM133m). YTD all Sarawak related contracts are infrastructure works which verifies our view that momentum of project flows in Sarawak are gaining traction as the next state elections must be held before Sept 2021. Infrastructure contracts that are expected to roll out in 2H are six bridge contracts with combined value of RM2.4bn under Sarawak Coastal Road and some packages from ECRL (RM44bn). Maintain NEUTRAL on the construction sector. Our top picks in the sector are IJM, Suncon and GKent.

Domestic contract sizes decline. Domestic contract awards to listed contractors totalled RM3.4bn in 2Q19 (-30% QoQ, -19% YoY). The decline in contract awards both QoQ and YoY is mainly due to smaller average contract size of RM115m (1Q19: RM176m, 2Q18: RM133m).

Notable contracts. Some of the sizable contract wins in 2Q include (i) Bloomsvale Residences (RM439m) to Kerjaya; (ii) Duta Park Residences (RM406m) to Fajarbaru and (iii) Petronas Leadership Centre (RM406m) to SunCon.

YTD. On a cumulative basis, 1H19 domestic contracts totalled RM8.1bn, falling 7% YoY. Infrastructure jobs made up 30% of domestic contracts YTD with the balance from building jobs (1H18: infrastructure 58%, building 42%). The decline in contracts value and lower proportion of infrastructure works were mainly due to holding back or downsizing of infrastructure projects post GE14. YTD, Sarawak related domestic contracts amounted to RM681m has been dished out and all of these contracts are infrastructure jobs. This verifies to our view that momentum of project flows in Sarawak are gaining traction as the next state elections must be held before Sept 2021.

2H contract newsflow. Infrastructure contracts that are expected to roll out in 2H are six bridge contracts with combined value of RM2.4bn under Sarawak Coastal Road and some packages from ECRL (RM44bn). Other material development related to the sector is recommencement of LRT3 project (RM16bn) after downsizing exercise and potential signing of PDP agreement of Penang Transport Master Plan (RM24bn).

Foreign jobs. Foreign contract awards in 2Q stood at RM48m (-92% QoQ, against zero foreign jobs in 2Q18). The steep QoQ decline was due to the high base effect in 1Q19 resulting from marine bridge contract in Taiwan (RM522m) awarded to Gamuda JV. Cumulative 1H foreign contracts up by more than 3-fold due to absence of foreign contract in 2Q18.

Maintain NEUTRAL. We are turning warmer on the construction sector given the positive news flow on several project revivals (ECRL, Bandar Malaysia and potentially HSR). We believe the worst is over for the construction sector but this has been largely reflected by the run in contractor’s share price YTD with the KLCON up +46%.

Top picks. IJM is our top pick in the large cap space as a beneficiary of the ECRL via construction contracts and the positive spill over effect to Kuantan Port (60% stake) and MCKIP (20% stake). Within the mid-small cap space, we like (i) SunCon as a well-managed pure construction play that is able to bid competitively within the increasing open tender landscape and (ii) GKent which as the only domestic rail systems specialist should benefit from the revival of rail projects.

Stock Call Changes

IJM - Maintain BUY

We maintain BUY rating for IJM higher higher TP of RM2.96 (from RM2.30) after we lowered down SOP discount to 10% (from 30%) pegged to unchanged SOP value of RM3.28 in view of improved domestic construction sector prospect. We like IJM as direct beneficiary of the ECRL via construction contracts and the positive spill over effect to Kuantan Port (60% stake) and MCKIP (20% stake)

Source: Hong Leong Investment Bank Research - 3 Jul 2019