1Q21 domestic contract awards totalled RM4.9bn (+108% QoQ, +27% YoY). Pick up was driven by increased activity from Sarawak which we believe should gradually gain momentum. We anticipate near term news flow from LSS4, PTMP, PBH Sabah and Sarawak jobs. Maintain NEUTRAL on the sector as political fluidity remains at play. Our top picks in the sector are IJM (TP: RM1.95) and SunCon (TP: RM2.01).

Rebound despite MCO2.0. Domestic contract awards to listed contractors totalled RM4.9bn in 1Q21 (+108% QoQ, +27% YoY). Contract flows in 1Q21 came back after cooling off in 4Q20. Impact of MCO2.0 on contract flows was negligible as business operations were largely intact. On a YoY basis, jobs were up by 27% mainly buoyed by revival in awards from East Malaysia (1Q21: RM1.4bn; 1Q20: RM170m). Excluding East Malaysian jobs, domestic awards would have fallen by c.6% YoY. Breaking down by job types, 1Q21 pickup was quite balanced between building and infra jobs.

Notable contracts. Notable contract wins in 1Q21 include (i) construction of UNIMAS hospital to Pansar (RM486m), (ii) affordable homes to MGB (RM443m) and (iii) airport expansion at Kota Bahru to WCT (RM440m).

Foreign jobs. Foreign contract awards in 1Q21 amounted to only RM399m (4Q20: RM15.2bn, 1Q20: RM3bn) with the sole contract awarded to SCIB for building jobs in Qatar and UAE. We reckon due to travel restrictions imposed last year, foreign tender activities were disrupted manifesting in low conversion tally this quarter.

Near term newsflow. Given that LSS4 bidders have been shortlisted, we anticipate conversion the near term. The recently announced PTMP reclamation works should see awards materialising by mid-2021. Down in Johor, RTS could also start moving near term but job awards likely only towards 2H21. We believe PBH Sabah subcontracts awards could materialise by year end as we anticipate impending appointment of PMC which would speed things up. ECRL has been disappointing so far, with beneficiaries limited to only a handful of listed contractors. We see Section C as more advantageous to listed contractors but the rollout timeline is ambiguous dragged by disagreements over alignment between state and federal governments. On the brighter side, MRT3 newsflow has picked up recently and expectations are for more to unfold towards the end of the year or early 2022. Sarawak seems to be churning out more jobs this year after a long dry spell in 2020. Our expectations remain that job flows will continue to pick up in the lead up to the state election. 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 challenges early in the year such as (i) KL-SG HSR cancellation; (ii) MCO2.0; (iii) steel price surge and (iv) state of emergency resulting in KLCON Index plunging by -13%, sector has largely rallied back since February on the back of cyclical/value rotation. At present, KLCON is trading roughly in-line with KLCI performance YTD (-0.1%). While we are positive on recent developments, political fluidity in 2H21 remains our key concern. As such, we maintain our NEUTRAL stance on the sector. Key catalysts are 12MP rollout and progress on MRT3. Downside risks include material setbacks in vaccine rollout, policy execution, political fluidity and escalating materials cost.

Top Picks. IJM (BUY, TP: RM1.95) 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 0.65x. Within the mid-small cap space, we continue to like SunCon (BUY, TP: RM2.01) 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 - 6 Apr 2021