3Q19 domestic contract awards totalled RM1.1bn (-68% QoQ, -81% YoY), bringing 9M19 sum to RM9.2bn (-36% YoY). The decline in contract awards both QoQ and YoY was due to smaller average contract size of RM90m (-22% QoQ, - 59% YoY) compounded by contraction in number of contracts awarded which totalled 12 in 3Q19 (2Q19: 29, 3Q18: 26). YTD, all Sarawak related contracts are infrastructure works which testifies to our view that momentum of project flows in Sarawak is gaining traction as the next state elections must be held before Sept 2021. Infrastructure contracts that are expected to roll out in 4Q19 are six bridge contracts with combined value of RM2.4bn under Sarawak Coastal Road. Maintain NEUTRAL on the construction sector. Our top picks in the sector are IJM and SunCon.

Domestic contract awards plunged. Domestic contract awards to listed contractors totalled RM1.1bn in 3Q19 (-68% QoQ, -81% YoY). The decline in value of contract awards both QoQ and YoY was due to smaller average contract size of RM90m (- 22% QoQ, -59% YoY) compounded by contraction in number of contracts awarded which totalled 12 in 3Q19 (2Q19: 29, 3Q18: 26).

Notable contracts. Some of the sizable contract wins in 3Q include (i) Park Regent (RM517m) to GDB Holdings; (ii) Waste transfer station, Kepong (RM120m) to Widad Group and (iii) Sibu Roadworks (RM104m) to HSL.

YTD. On a cumulative basis, 9M19 domestic contracts totalled RM9.2bn, declining 36% YoY. Infrastructure jobs made up 31% of domestic contracts YTD with the balance from building jobs (9M18: infrastructure 46%, building 54%). 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 amounting to RM815m have been dished out and all of these contracts are infrastructure related. This testifies to our view that momentum of project flows in Sarawak is gaining traction as the next state elections must be held before Sept 2021.

4Q19 contract newsflow. Budget 2020 (11 Oct) is anticipated to be growth tilted with potential announcements on infrastructure projects, possibly RTS, MRT3 and HSR. Elsewhere, contracts that are expected to roll out are six bridge contracts with combined value of RM2.4bn under the Sarawak Coastal Road. Other material developments related to the sector are ramp up of LRT3 project (RM16bn) in 4Q19 and potential signing of PDP agreement for Penang Transport Master Plan by year end (RM24bn). Additionally, in 3Q19, WCT accepted a Letter of Intent (LOI) pertaining to building works contract for Phase 2 of Pavilion Damansara Heights (PDH2) for an estimated contract sum of RM1bn. Management expects the final award to be announced in 4Q19.

Foreign jobs. Foreign contract awards in 3Q spiked to RM918m (2Q19: RM48m, 3Q18: RM109m). The steep QoQ increase resulted from 13 piling contracts in Singapore (RM327m) awarded to Pintaras Jaya as well as road construction contract in Iraq awarded to Bina Puri (RM303m), on back of a low base effect as well. Cumulative 9M foreign contracts up by more than 6-fold due to domestic contractors shifting focus overseas post GE14 and absence of foreign contract in 2Q18.

Maintain NEUTRAL. We remain neutral on the construction sector despite the positive news flow on several project revivals (ECRL, Bandar Malaysia and potentially MRT3). We believe the worst is over for the construction sector but this has been largely reflected by the share price rally YTD with the KLCON up +31%.

Top picks. IJM remains 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 SunCon as a well-managed pure construction play that is able to bid competitively within the increasing open tender landscape.

Source: Hong Leong Investment Bank Research - 3 Oct 2019