1Q20 domestic contract awards totalled RM2.9bn (+55% QoQ, -40% YoY). Infrastructure jobs remain weak declining by -10% QoQ and -63% YoY outpaced by building jobs (+94% QoQ, -27% YoY). Broadly speaking, project rollouts may have been dragged by the seismic shifts in Malaysia’s political landscape and nationwide implementation of MCO could spark further delays to the original timeline. For now, we maintain NEUTRAL due to the already steep correction in KLCON (YTD: -29.9%). Key upside risks remains revival of shovel ready projects like MRT3. Our top picks in the sector are SunCon and Taliworks.

Weak infra. Domestic contract awards to listed contractors totalled RM2.9bn in 1Q20 (+55% QoQ, -40% YoY). The second consecutive QoQ growth (first since GE14) was in essence driven by more robust flows of building jobs (+94% QoQ) offsetting decline in infrastructure awards (-10% QoQ). 1Q20 exhibited sequential growth on the back sizable building jobs anchored by award of Pavillion Damansara Heights phase 2 (RM1.2b) to WCT. On a YoY basis, value of contract awards contracted by 40%, with infrastructure and building jobs declining by -63% and -27% respectively. The decline was due to high base effect as 1Q19 saw strong contract flows buoyed by infrastructure awards for SUKE and Gemas-JB double track as well as various apartment building jobs. 1Q20 marks 7 consecutive quarters of building awards outpacing infrastructure (building: 78%, infra: 22%) where the split was rather even previously.

Notable contracts. Some of the sizable contract wins in 1Q20 include (i) Pavillion Damansara Heights, Phase 2 (RM1.2b) to WCT; (ii) Aspen Vision City, Penang (RM617m) to Kerjaya Prospek and (iii) TRX Residences (RM530m) to IJM Corp.

Strong inflow of foreign jobs. Foreign contract awards in 1Q20 increased to RM2.9b (4Q19: RM127m, 1Q19: RM615m). The steep increase was driven by various commercial project awards in India and Middle East (RM1.1b) awarded to Eversendai, seawall construction in Taiwan (RM933m) to Gamuda and tolled highway in India (RM500m) to SunCon. Post-GE14, domestic contractors have shifted focus overseas as domestics opportunities dried up. Nonetheless, we think delays in award conversion led to rather lumpy awards materialising this quarter. However, moving forward foreign opportunities may shrink as the geographical spread of Covid-19 widens potentially leading to tender delays overseas.

Multiple disappointments. For 1Q20, infrastructure rollouts were a major disappointment. Awards for big projects expected in 1Q20 were package 28-30 of PBH Sabah, package B of ECRL as well as signing of the PDP agreement for PTMP which ultimately did not meet market expectations. Broadly speaking, project rollouts may have been dragged by the seismic shifts in Malaysia’s political landscape and nationwide implementation of MCO could spark further delays to the original timeline. Tender progress for ECRL might have stumbled as land acquisition has not been up to speed. Nevertheless, we gather there is some progress as issuance of sukuk facility to finance the ECRL is in the works (in addition to the China EXIM loan). Given the multiple moving parts, ECRL jobs could only come about in 2H20. For the PTMP, timeline of sealing the PDP agreement has been delayed to 2Q20 with reclamation works to come thereafter. Limited financing options (initially exploring contractor financing & loan facility options) for the reclamation may diminish even further, in our view. We think that contractors with larger balance sheet capacity (tends to be diversified contractors) are hit on multiple angles from Covid-19 (balance sheet to deteriorate) effectively eliminating the contractor financing option. Without meaningful progress in firming up a funding structure for reclamation works, other parts of the PTMP may not move.

Deadlines approaching. Deadlines for HSR and RTS are fast approaching (HSR: May 2020; RTS: April 2020). We reckon the deadlines could yet be further extended as both governments concentrate resources on tackling the Covid-19 instead. Under the previous PH government, HSR was likely to get the go ahead post-fat trimming. Meanwhile, RTS was given the green light to proceed in Budget 2020 pending the finalisation of terms.

Maintain NEUTRAL. Prospects for the sector looks fairly muted due to earnings risks from weaker progress billings and cash flow pressure. Additional sector uncertainty emanates from delays in project rollout owing to the changes in political landscape. For now, we maintain NEUTRAL due to the already steep correction in KLCON (YTD: -29.9%). Key upside risks remains revival of shovel ready projects like MRT3.

Top Picks. We continue to like SunCon (BUY, TP: RM1.84) due to (i) healthy balance sheet; (ii) consistent execution and (iii) strong support from parent-co.

Taliworks (BUY, TP: RM1.02) is our other top pick providing yields of 8.0% for FY20- 21.

Source: Hong Leong Investment Bank Research - 7 Apr 2020