Notable contracts. Some of the sizable contract wins in 4Q19 include (i) 99 Residence (RM316m) to Crest Builder; (ii) sewerage treatment facilities (RM254m) to Kumpulan Powernet and (iii) Hyatt Hotel, Sabah (RM213m) to GDB Holdings.

CY19. On a cumulative basis, CY19 domestic contracts totalled RM11.0bn, declining 40% YoY. Infrastructure jobs made up 33% of domestic contracts with the balance from building jobs (CY18: infrastructure 43%, building 57%). The decline in contracts value and lower proportion of infrastructure works (Infra: -54% YoY; Building: -29% YoY) were mainly due to holding back or downsizing of infrastructure projects post GE14. Sarawak related domestic contracts amounting to RM964m have been dished out and with a significant portion being infrastructure related (78%). We reckon momentum of project flows in Sarawak will reaccelerate after slowing down in 2H19 as the next state elections must be held before Sept 2021.

1H20 contract newsflow. 1H20 should be dominated by tender news flow regarding ECRL (RM44bn), Pan Borneo Sabah (RM12.3bn), SCRN (RM6bn) and Second trunk road (RM5bn). Based on news reports, we understand packages 28, 29 and 30 of PBH Sabah with a cumulative value of RM925m will be tendered out by 1Q20 with remaining 20 packages to be included under the 12th MP (2021-2025). Other material developments related to the sector in 1H20 are ramp up of LRT3 project (RM16bn) and potential signing of PDP agreement for Penang Transport Master Plan (RM24bn) which should pave the way for physical works on Bayan Lepas LRT (RM8.4bn). Elsewhere, HSR and MRT3 have recently been hitting the headlines with the former mentioned by PM Tun M as likely to go ahead post-fat trimming (deadline: May 2020). According to TheStar, Minister Anthony Loke stated that the government is considering reviving MRT3 with a decision likely in mid-2020.

Foreign jobs. Foreign contract awards in 4Q19 declined to RM127m (3Q19: RM918m, 4Q18: RM148m). The steep QoQ decline was primarily due to high base in 3Q19 as 13 piling contracts in Singapore (RM327m) were awarded to Pintaras Jaya coupled with road construction contract in Iraq awarded to Bina Puri (RM303m). Cumulatively, CY19 foreign contracts were up by more than 4-fold due to a combination of domestic contractors shifting focus overseas post-GE14, further buoyed by absence of foreign contracts most notably in 2Q18.

Maintain NEUTRAL. Maintain NEUTRAL on construction despite the impending recovery due to the strong rally post-revival of ECRL and Bandar Malaysia (KLCON CY19: +34%). In spite of the recovering landscape, absent of further details and timeline clarity for additional mega infra catalysts (HSR & MRT3) we believe current valuations have baked in the recovery prospects capping the potential of a broad sector rally. Nonetheless, positive newsflow and healthy orderbook levels (average cover: 4.8x) should provide downside risk protection.

Top Picks. We continue to like SunCon (BUY, TP: RM2.30) due to (i) ample balance sheet capacity; (ii) positive earnings trajectory and (iii) strong support from parent-co. HSL (BUY, TP: RM1.64) is our other top pick as a proxy to the Sarawak construction upcycle.

Source: Hong Leong Investment Bank Research - 6 Jan 2020