Momentum of project flows in Sarawak are gaining traction and its related 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 300 telecommunication towers with total value (includes tower and EPCC) of RM1bn. We understand that PDP agreement for PTMP is likely to be signed with SRS Consortium (60% owned by Gamuda) in 3Q19 after all approvals are obtained which is expected in the near term. We reckon that HSR and MRT3 are the next mega infrastructure projects to be revived. Maintain NEUTRAL on the construction sector. Our top picks in the sector are IJM, Suncon and GKent.

Robust expenditure from Sarawak. YTD, Sarawak related domestic contracts amounting to RM681m have 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, coupled with development expenditure amounting to c.RM9bn under the State’s Budget 2019, which is the biggest in its history. Sarawak related infrastructure contracts that are expected to roll out in 2H19 are six bridge contracts with combined value of RM2.4bn under Sarawak Coastal Road and 300 telecommunication towers with total value (includes tower and EPCC) of RM1bn.

PTMP. We understand that PDP agreement for Penang Transport Master Plan (PTMP) is likely to be signed with SRS Consortium (60% owned by Gamuda) in 3Q19 after all approvals are obtained which is expected in the near term. Funding for the project is likely to come from the Federal Government, international development banks (such as Asian Development Bank) or a combination of both. Land swap in lieu of construction payment is no longer applicable under the new funding model. A likely scenario is that reclamation works for Island A will start in 2H20 with key infrastructure components (such as Bayan Lepas LRT and Pan Island Link (PIL)) following between 3-6 months thereafter. To recap, Phase 1 of PTMP project under SRS involves construction of Bayan Lepas LRT, PIL and reclamation of Island A (2,300 acres). Phase 1 is expected to take 7-8 years and costs RM24bn tentatively.

Revival of HSR and MRT3? We reckon that the reinstatement of Bandar Malaysia may serve as a prelude to the possible revival of the KL-Singapore HSR (RM60- 70bn). Bandar Malaysia was previously supposed to host the terminus of the HSR. Technical and commercial advisory consultants have been appointed to study into engineering and commercial aspects of the HSR. Another mega infrastructure project that we deem highly likely to be revived is MRT3 (RM45bn) as it is a crucial part of Klang Valley rail network. MMC Corp (non-rated) had submitted a proposal to the government to revise the project in which it would be completed in phases and underground stations to be changed to elevated stations.

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 and MRT3). 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 +47%.

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.

Source: Hong Leong Investment Bank Research - 17 Jul 2019