KLCON is lagging KLCI by -10% YTD dragged by political flare ups and lockdowns. Looking into 2022, we are forecasting a doubling of sector earnings (low base) driven by higher productivity and margins. Awards could recover driven by both private and public sectors. Smooth progress for MRT3 could see tenders by 3Q22; awards in 2023. We foresee jittery sector sentiment on account of looming election risks similar to previous cycles. Maintain NEUTRAL. Top picks are SunCon (BUY, TP: RM1.75) and Kimlun (BUY, TP: RM1.07).

A year to forget. KLCON is lagging KLCI by -10.4% YTD as negatives like multiple MCOs, HSR cancellation, political flare-ups and disappointing Budget dragged the index. Details on MRT3 in Apr-21 did little to spur index to new heights as Covid risks outweighed. On a relative basis, IJM was the key performer outperforming the KLCON by 14.1% (special divvy adjusted) riding on its IJMP value unlocking.

GPD recovery, earnings to follow. Construction GDP is slated to rebound 16.6% in 2022 (HLIB). In tandem, we have pencilled in a doubling of sector cumulative earnings driven by higher site productivity and better margins. Our FY22 forecasts is roughly 15% lower than pre-Covid on account of: (i) impaired productivity, (ii) worsening labour shortage, (iii) hostile costs environment and (iv) lower outstanding order book. We see limited scope for earnings upgrades as the aforementioned factors are likely to persist in 2022. To the contrary, should Omicron prove nastier, another earnings downgrade cycle might be triggered.

Endemicity key jobs driver. Domestic jobs in 11M21 (+30% YoY) were public sector driven while private sector floundered. We cautiously expect gradually improving contract flows as Malaysia embraces endemicity with private sector opportunities and rollouts of public projects like ECRL, PBH, RTS, CSR to keep the tap running in 2022. Higher DE (+22%) bodes well for the general tender environment even with new big ticket projects missing. Implementation of existing mega projects should also continue to selectively present opportunities. Developments on MRT3 could catalyse flows with open tenders targeted for 3Q22; awards in 2023. Downside risks are HOC expiry, rate hikes, delays due to high materials price and election overlaps.

Jittery on looming event risk. We foresee elevated election risks denting sentiment next year. This could potentially weigh on news flow catalysts. There was significant de-risking activity in the past two election cycles resulting in pullbacks of 9-14% and P/B derating of 13%/18% but low sector ownership this time does mitigate to some extent. Comparatively, we anticipate less pronounced volatility this time due to: (i) low foreign ownership in heavyweights (c.12-13%; 5 year peak: c.30%) and 2) low expectations (P/B trading at 0.61~59% discount to KLCI; 12.2x P/E ~5 year average). However, 2022 could see an extra element of market unpredictability vis-à-vis past cycles with stamp duty cap removed.

Maintain Neutral. We retain our sector NEUTRAL weight as fluidity of looming elections could weigh on sector sentiment with investors adopting a wait and see approach. Sector valuations are on the lower end at 12.2x P/E NTM EPS (5 year average) and 0.61x P/B (-1SD 5 year range). Recent news flow on critical projects like MRT3 is encouraging but we remain cautious on timeline and overall sector earnings execution amidst ongoing virus spread. Within the mid cap space we prefer SunCon (BUY, TP: RM1.75) due to (i) strong balance sheet; (ii) extensive track record of infrastructure projects and (iii) strong support from parent-co. For small cap, we like Kimlun (BUY, TP: RM1.07) for its solid orderbook, decent job visibility and niche exposure to MRT3. Stock trade at an attractive 6.0x P/E Multiple and 0.35x P/B offering good risk reward.

Source: Hong Leong Investment Bank Research - 22 Dec 2021