2Q20 domestic contract awards totalled RM1.1bn (-71% QoQ, -66% YoY). Weakness was seen in both infrastructure and building jobs. Project rollouts may have been dragged by the nationwide implementation of MCO. Contract flows are anticipated to mildly recover in 2H20 underpinned by ECRL rollout.

Maintain NEUTRAL as mega infra news flow is largely offset by weaker private jobs outlook. Key downside risks include: (i) political leadership changes/ snap elections, (ii) resurgence of Covid-19 cases and (iii) margin downside risks (SOP measure and labour constraints). Our top pick in the sector is SunCon.

Weak 2Q20 numbers. Domestic contract awards to listed contractors totalled RM1.1bn in 2Q20 (-71% QoQ, -66% YoY). This bucks the trend of 2 consecutive QoQ growth previously, (first since GE14) resulting from a steep decline in private building jobs (-85% QoQ). 2Q20’s drastic fall was mainly due to the enforcement of MCO which saw virtually no domestic contracts awarded in April-20 to listed companies. On a YoY basis, value of contract awards fell by 66%, with infrastructure and building jobs declining by -21% and -80% respectively. The deterioration was far larger on the building side as most corporate offices were closed during the unrelaxed MCO. In part, cushioning the fall in infra contracts were the roll out of contracts for ECRL’s initial works (Section B). Contrasting with the last 7 quarters where building awards outpaced infrastructure, 2Q20 was dominated by infra (infra: 55%; building: 45%).

Notable contracts. Some of the notable contract wins in 2Q20 include (i) ECRL initial works to (i) Gadang (RM82m), (ii) AQRS (RM37m) and (iii) Ho Hup Construction (RM103m).

Strong flow of foreign jobs. Foreign contract awards in 2Q20 increased to RM9.9b (1Q20: RM3.0b, 2Q19: RM48m). The sizable increase was primarily driven by an award worth RM7.7bn by Block 7 investments to Serba Dinamik with regards to the construction of an innovation hub in UAE. During the quarter, another notable foreign job award was secured by Sarawak Consolidated for the construction of various buildings in Oman and Qatar worth RM865m. Foreign job awards continue to stay elevated as post-GE14, as domestic contractors continue to look overseas as domestics opportunities stay muted.

Better 2H20. While contract awards have been anaemic in 1H20 (-39% YoY), we expect a mild pickup in 2H20. Awards have been largely disrupted by a combination of political fiasco as well as MCO. Comfortingly, Perikatan Nasional (PN) government has reiterated their commitment towards ensuring execution of projects under Budget 2020. Notably, some ECRL Section B job awards for initial works have materialised going to Gadang (RM82m), AQRS (RM37m) and Ho Hup Construction (RM103m). Gadang’s management has placed conservative margin guidance of 3-5% after factoring in Covid-19 impact (possibly from SOPs). Recently, Section A was also given final approval which could result in job awards toward the end of 2020. Meanwhile, Section C which saw heaviest realignment by the PH government, completed its public inspection period recently. However, latest reports suggest potential realignment for Section C (Mentakab-Port Klang) whereby the BN era alignment crossing through Bentong to Gombak (involves a 16km tunnel) could make a comeback. Costs for the latter are certainly higher (estimated RM8b or more) and could require reworking the existing financing structure. Despite potential implementation delays for Section C, they may not be substantial as previous alignment has undergone public inspection in 2017. Another mega project, Pan Borneo Sabah has been rather quiet, derailed by political leadership changes but the new government has reiterated its intent on speeding up its progress. We believe an ailing economy will provide the impetus for the government to reaccelerate the project

Source: Hong Leong Investment Bank Research - 8 Jul 2020