We Expect Contract Awards and Newsflow to Accelerate Going Forward Due to Recovery in Development Expenditure as the Government Rolls Out Major Infrastructure Projects. Stronger Job Flows From Sarawak Are Anticipated With a Record High Allocation of C.RM10bn for Development Expenditure (State Budget 2020). Maintain NEUTRAL on Construction Despite Impending Recovery Due to the Strong Rally (KLCON 2019: +34%) Suggesting That Recovery Prospects Are Priced In. Nonetheless, Mega Projects News Flow and Healthy Orderbook Levels (average Cover Ratio: 4.8x) Should Protect on the Downside. Our Top Picks Are SunCon (BUY, TP: RM2.30) and HSL (BUY, TP: RM1.64).

Higher development expenditure. Development expenditure (DE) for 2020 is expected to rebound by 4.3% YoY to RM56bn vs 2019’s -4.3% decline as the Government rolls out previously delayed infrastructure projects. Finance Minister Lim Guan Eng alluded to allocating the unspent DE of RM1bn in 2019 to 2020 (Budget 2019: RM54.7bn; Actual 2019: RM53.7bn). We anticipate a pick-up in construction contract awards off a low base (CY19 domestic contract awards to listed contractors are down -40% YoY) moving forward.

Sarawak upcycle. Job flows in Peninsular Malaysia remained tepid in 2019 with Sarawak jobs picking up the slack. We expect stronger job flows as the state government has allocated RM9.9bn for development expenditure under the State Budget 2020, beating its previous high of RM9bn in 2019. Second Trunk Road project (RM5bn) is slated to see 11 sub-packages tendered out in early 2020. Another mega project in the pipeline is the Sabah-Sarawak Link Road (RM5.4bn). The first work package (RM1.2bn) stretching 90km is to be tendered out by 1H2020 with works to start by 4Q2020. Implementation of water related projects and wastewater management worth RM2.8bn are also ongoing since 2018.

Mega infra to feature. Moving into 2020, 1H should be dominated by tender news flow regarding East Coast Rail Link (ECRL) and Pan Borneo Sabah (PBHS) which will see packages 28, 29 & 30 (RM980m) will be tendered out in March 2020 with remaining 20 packages falling under the 12th MP (2021-2025). Based on news reports, the government is expected to come to a decision for High Speed Rail (HSR) and MRT3 by mid-2020. PTMP (RM24b) may feature in 2H20 starting with Bayan Lepas LRT (BLLRT) to be rolled out if the bond funding is firmly in place. To recap, the Penang CM has recently said the state will issue a RM10bn federal-guaranteed sukuk to finance the railway project. Smaller projects like Rapid Transit System (RM3.2bn) and Iskandar BRT (RM2bn) may also come into the foray in 2H. In our view, projects like Pan Island Link 1 (PIL1), MRT3 and HSR will likely be included under 12th MP (2021-2025) due to (i) insufficient funding from the bond issuance (PIL1) and (ii) unlikely to implemented quickly due to funding and design complexity (MRT3 & HSR).

Maintain NEUTRAL. Maintain NEUTRAL on construction despite the impending recovery due to the strong sector rally post-revival of ECRL and Bandar Malaysia (KLCON 2019: +34%). In spite of the recovering landscape, absent of further details and timeline of mega infra catalysts (MRT3 & HSR), we believe current valuations have baked in the recovery prospects capping a potential broad sector rally. Nonetheless, positive news flow and healthy orderbook levels (average cover: 4.8x) should cushion the downside.

Top Picks. We continue to like SunCon (BUY, TP: RM2.30) due to (i) strong balance sheet; (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 - 16 Jan 2020