3Q21 domestic contract awards totalled RM4.1bn (2% QoQ, -11% YoY). 9M21 featured stronger contributions from water, affordable housing and private building jobs. 4Q should see rollout of the Rasau water scheme. Maintain NEUTRAL on the sector. Our cautious tone is predicated on: (i) lack of new mega jobs, (ii) back-loaded DE allocation; 2023 onwards and (iii) downside risk to actual allocation towards physical infrastructure. Nevertheless, we believe mega jobs could be announced on a rolling basis but timing is uncertain. We would only turn positive should tangible developments for sizable projects turn up. Our top pick is SunCon (BUY, TP: RM1.87).

Flattish QoQ. Domestic contract awards to listed contractors totalled RM4.1bn in 3Q21 (2% QoQ, -11% YoY). We note that most jobs awarded in 3Q21 came from projects outside the Klang Valley area which have transitioned into advanced phases of the NRP (relatively quicker), facilitating contract flow recovery. As such, our expectations of an overall drop off did not materialise with jobs flows being flattish instead. The quarter saw pick-up in solar and factory jobs. On YTD basis, contracts awarded were higher (+36%) largely due to low base effect as 2Q20 saw strict lockdowns imposed (MCO1.0). For 9M21, we note stronger contributions from water projects (RM767m) and affordable housing projects (RM1.2bn) which were significantly lower last year. Private building jobs also managed to sustain at a normalised rate of RM1.4-1.8bn per quarter in 9M21, but were understandably lower in 3Q21.

Notable contracts. Notable contract wins in 3Q21 include (i) Sapangar Bay port expansion in Sabah to WCT-CCCC JV (RM899m), (ii) construction of mixed development project in Johor to Mercury (RM450m) and (iii) factory construction in Sarawak to KGB (RM420m).

Foreign jobs. There was only one foreign contract award this quarter which involved various piling works in Singapore awarded to Pintaras Jaya for a contract sum of RM142m.

4Q21. Going into the final quarter, we expect the Rasau water scheme packages to be the only notable project with a visible roll out timeline. Phase 1 contracts will be awarded in two stages, Nov-21 and Jan-22. Other than that, progress on sizable jobs like PSI and MRT3 have yet again been delayed. We look to the Budget-22 announcement to ascertain prospects of high impact project flows going into 2022. However, we note that Budget-22 is being prepared collaboratively in bipartisan spirit with opposition-PH, perhaps dimming the outlook for mega projects. On a similar note, the recent 12MP announcement did indicate that funding next year would focus on ongoing jobs instead. On the flip side, private sector opportunities should improve as Malaysia transitions to the endemic phase. Some tender outcomes which have been repeatedly delayed since late last year could begin rolling out towards year end.

Maintain NEUTRAL. We maintain our NEUTRAL weight on the sector despite record high DE allocation in 12MP. Our cautious tone is predicated on: (i) lack of new mega jobs (ii) back-loaded DE allocation; 2023 onwards and (iii) actual allocation toward physical infrastructure is unclear; portion of DE goes to rehab agencies. Nevertheless, we believe mega jobs could be announced on a rolling basis but timing is uncertain due to: (i) fluidity of government finances (recovery timing etc.), (ii) elevated input costs and (iii) optimising PFI in funding structure. We would only turn positive should tangible developments for sizable projects turn up.

Top Pick. We prefer SunCon (BUY, TP: RM1.87) due to (i) strong balance sheet; (ii) extensive track record of infrastructure projects and (iii) strong support from parent-co. conditions. The company’s ability to secure overseas contracts and source of jobs from parent-co provides a shield from weak flow of government projects.

Changes in Forecasts and TP

IJM Corp. We cut FY22/23/24 earnings forecasts by -17.4%/-22.3%/-21.8% to reflect the de-consolidation of IJMP post-disposal and recalibrating margin assumptions for infrastructure division. Our SOP-driven TP falls to RM1.96 (from RM2.18) after adjusting for RM800m or RM0.22/share of plantation sale proceeds, redeployed for capital management by way of special dividend and share buybacks. The stock provides a yield of 11.7% and capital upside of 8.9%. Maintain BUY.

WCT. We downgrade the stock to HOLD (from Buy) following the recent share price rally (+25% since August). Our SOP-driven TP rises slightly to RM0.64 (from RM0.61) after minor changes to discount rates used for its property division. The stock now trades at a fairer FY22/23 P/E multiple of 22.7x/11.4x and a P/B multiple of 0.3x (similar to pre-pandemic levels).

Source: Hong Leong Investment Bank Research - 5 Oct 2021