4Q20 domestic contract awards totalled RM2.4bn (-49% QoQ, +27% YoY). Sequential cooling off in 4Q20 was due to pandemic fair ups and higher base in 3Q20 from pent up conversion. 2020 contracts were supported by building jobs offsetting weak infra rollouts. We anticipate near term news flow from 12MP, LSS4, PTMP and Sarawak jobs. Maintain NEUTRAL on the sector as critical details regarding key mega projects remain scarce. Our top picks in the sector are IJM (TP: RM1.99) and SunCon (TP: RM2.11).

Sequential cooling off in 4Q20. Domestic contract awards to listed contractors totalled RM2.4bn in 4Q20 (-49% QoQ, +27% YoY). Contract flows in 4Q20 cooled off after rebounding in 3Q20 with recovery momentum slowing possibly due to Covid-19 flare ups during the quarter. We believe 3Q20’s rebound was also boosted on the back of converting pent-up/delayed awards resulting from Covid-19 lockdown in 2Q20. On a YoY basis, jobs were up by 27% with building-related jobs picking up the slack (+59%) offsetting a weaker infrastructure rollout (-27%).

2020 buoyed by private jobs. For full year 2020, job awards were up by 8% to RM11.9bn despite a pandemic marred year. We note that job flows in 2020 were picked up by stronger building related job flow (+29%) with bulk of it materialising in 2H20 (c.60%). As for infrastructure, awards were down by -34% marred by the reprioritisation of government resources to meet challenges presented by Covid-19. Compounding this is the political see-saw at the start of the year leading to slower rollout of jobs as evidenced by downward revision in 2020 development expenditure (DE) to RM50bn. On a further note, certain sizable building contracts awarded in 2020 were previously delayed jobs, as such we anticipate pipeline of pent-up/delayed jobs to be weaker in 2021.

Notable contracts. Some of the notable contract wins in 4Q20 include (i) main building works at 8 Conlay to GDB (RM1.25bn), (ii) main building works at M Arisa to TCS (RM323m) and (iii) EPCC of mini-hydro in Perak to KPower (RM296m).

Foreign jobs. Foreign contract awards in 4Q20 surged to RM15.2bn (3Q20: RM856m, 4Q19: RM127m). The dramatic surge was largely driven by a RM12.9bn BOT contract executed by Toyo Ventures after a 12 year wait. Another sizable foreign project secured in 4Q20 was Bangkok HSR project secured by Bina Puri worth RM1.0bn. During the quarter, Econpile also secured a RM348m job for piling and substructure works in Cambodia. Point to note, these jobs we gather have been pending conversion for some time.

1H21 news flow. In the near term, sector news flow will be driven by 12MP announcement (early 2021). We anticipate clearer details on MRT3 and possible hints on the fate of a domestic HSR. Broadly speaking, the plan is expected to feature record high DE as GoM’s 2021-2023 DE roadmap has already cumulatively made up 98% and 86% of 10MP and 11MP allocation respectively. In terms of sub-sector allocation, we foresee a broad approach. Tender results for LSS4 could materialise in 1Q21 (tenders closed 3Q20). Various infrastructure jobs receiving allocation in Budget-21 could start coming out in 1H21 (includes bridges and federal roads). Down south, contracts for Johor-SG RTS should start trickling out possibly in 2Q21. We also anticipate a slew of jobs from Sarawak in the lead up to the state election. Additionally, reclamation works for the PTMP are slated to begin by 1H21. As for private building jobs, we reckon 1H21 would be relatively subdued after a surprisingly strong 2020. Contract flows should resume once property stock is appropriately digested by the market possibly towards the latter part of this year.

Maintain NEUTRAL. Despite being positive on pump priming measures introduced by the government, critical details regarding key sector projects like MRT3 and domestic HSR remains absent. We retain our NEUTRAL sector weight as we view these mega jobs as crucial for a sustained upswing. The KLCON index trades at a forward P/E of 12.1x. Key catalysts are 12MP rollout and additional details on MRT3/ domestic HSR. Downside risks include material setbacks in vaccine rollout, policy execution and inconclusive GE-15.

Top Picks. IJM (BUY, TP: RM1.99) is our top pick in the large cap space as a potential beneficiary of government’s infrastructure pump-priming spurred by its breadth of rail related construction experience. Against this backdrop, the company trades at an attractive P/BV of 0.62x with all-time low foreign shareholding levels (c.13% vs previous low of 20%). Within the mid-small cap space, we continue to like SunCon (BUY, TP: RM2.11) due to (i) strong balance sheet; (ii) extensive track record of infrastructure projects and (iii) strong support from parent-co.

Source: Hong Leong Investment Bank Research - 11 Jan 2021