4Q21 domestic contract awards totalled RM6.3bn (54% QoQ, 169% YoY). 2021 featured stronger contributions from water, affordable housing, solar and road projects; private jobs remained flattish. Moving ahead we cautiously expect to see gradually improving contract flows as Malaysia progressively enters the endemic stage. Maintain NEUTRAL on the sector as fluidity of looming elections could weigh on sector sentiment with investors adopting a wait and see approach. Our top picks are SunCon (BUY, TP: RM1.77) and Kimlun (BUY, TP: RM1.07).

Year-end surge. Domestic contract awards to listed contractors totalled RM6.3bn in 4Q21 (+54% QoQ, +169% YoY). The final quarter was boosted by RM1.6bn worth of awards from water and solar projects, notably Rasau Water Scheme (RM896m) and LSS4/rooftop (RM571m). For the latter, since project shortlisting in March, LOAs has been trickling out on a delayed basis due to inflationary costs pressure. Nonetheless, its targeted COD of 31 Dec-23 has put a stop to further conversion delays. As for the former, 2/3 of available packages (RM896m) were awarded in 4Q21 as guided by Air Selangor at the start of 2021. On YTD basis, contracts awarded were higher by 63% YoY largely due to low base effect as 2020 (i.e. 2Q20) saw strict lockdowns imposed (MCO1.0). This year saw stronger water, affordable housing, solar and road projects, i.e. public sector funded jobs. Private sector contracts remain more or less flattish as 2021 continued to see restrictions denting rollout optimism.

Notable contracts. Notable contract wins in 4Q21 include (i) Package 2 & 3 of Rasau to Taliworks (RM896m), (ii) Sabah Sarawak Link Road package to Kimlun (RM780m) and (iii) aerotrain project in KLIA to Pestech (RM743m).

Foreign jobs. There was only one foreign contract award this quarter which involves upgrading of various substations in Philippines to Pestech for a contract sum of RM157m.

2022 jobs outlook. Moving ahead, we cautiously expect to see gradually improving contract flows as Malaysia progressively enters the endemic stage. Our expectations are for a recovery in private sector opportunities and ongoing rollouts of existing projects like ECRL, PBH Sabah & Sarawak, Johor-SG RTS, CSR to support job flows in 2022. We also look forward to the rollout of Sarawak Metro which costs RM6bn. The Home Ownership Campaign (HOC) and low interest rates lifting property sales in 2021, could see a ramp up in private sector contract awards, considering the repeated award delays in 2021. The downside to this though is dampening of sentiment from: (i) HOC expiry, (ii) interest rate hikes (HLIB: 4Q22) and (iii) rollout delays due to high materials price. On the public sector side, higher DE does bode 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 for contractors but we do note that most packages under existing projects have been tendered out therefore limited impact on sector earnings prospects.

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 12.9x P/E NTM EPS (5 year average) and 0.65x 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: RM1.77) 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, alongside attractive 6x P/E and 0.35x P/B.

Source: Hong Leong Investment Bank Research - 10 Jan 2022