HLBank Research Highlights

Construction - Not Yet Seeing the Pick-up

HLInvest
Publish date: Mon, 04 Jul 2022, 09:38 AM
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This blog publishes research reports from Hong Leong Investment Bank

1H22 domestic contract awards totalled RM4.5bn (-49% YoY). Awards were largely made up of private sector/solar jobs. On the whole, we reckon the significantly volatile and inflationary costs environment has made tenders trickier as most contracts are typically executed on a fixed price basis. Moving ahead we expect sector flows to finish strong buoyed by the MRT3 project; delays notwithstanding. We retain our sector NEUTRAL weight on two key reasons: (i) high materials costs and (ii) possible event risk in 2H22. We continue to expect sector coverage earnings to recover this year but we flag rising concerns over deteriorating labour shortage situation. Preferred pick remains SunCon (BUY, TP: RM1.84)

Weak 1H22. Domestic contract awards to listed contractors totalled RM2.3bn in 2Q22 (+1% QoQ, -44% YoY). Awards were largely made up of private sector (buildings) constituting 35% of awards during the quarter under review. There was no sequential pickup as jobs remained flattish, with the quarter seeing major price hikes in cement while fuel and premix materials crept up higher. Jobs flows were weak in 1H22 amounting to only RM4.5bn (-49% YoY). The average sizes of contracts were also notably smaller compared to the year before. On the whole, we reckon the significantly volatile and inflationary cost environment has made tenders trickier as most contracts are typically executed on a fixed price basis.

Notable contracts. Notable contract wins in 2Q22 include (i) construction of robotic rehabilitation centre to Vizione (RM654m), (ii) main building works to Kerjaya Prospek (RM265m) and (iii) mixed development project to Tuju Setia (RM257m).

Foreign jobs. There were two foreign contracts secured during 2Q22 being: (i) Coffs Bypass road project (RM2.05bn) and (ii) various piling works (RM90m).

Could finish strong. Despite a beleaguered jobs flow situation in 1H22 – we believe caused by relentless inflationary pressure and labour shortage – we continue to expect recovery in flows this year mainly driven by the MRT3 rollout in Dec-22. Based on industry checks, the three civil turnkey contracts could carry a total value of RM26- 28bn. Civil tender briefings were held recently and factoring in the evaluation period, we think that Dec-22 is a reasonable timeline (assuming no GE in between). Thereafter, we would expect a string of subcontract awards in 1Q23. Given that the minimum payment moratorium period is two years, contractors with better balance sheets are significantly advantaged in tenders. Prior to the aforementioned mega jobs, we would anticipate ECRL, Kuching ART and snippets from various highway projects including in East Malaysia. The EIA for the PSR project was also recently resubmitted in May but progress to be award ready could be further down the road.

Maintain Neutral. We retain our sector NEUTRAL weight on two key reasons: (i) soaring materials costs (impacts job flows and margins) and (ii) possible event risk in 2H22. We continue to expect sector coverage earnings to recover this year but we flag rising concerns over deteriorating labour shortage situation. Sector valuations are fair trading at 12.9x forward P/E and 0.7x P/B.

Preferred picks. Within the mid cap space we prefer SunCon (BUY, TP: RM1.84) due to (i) strong balance sheet; (ii) extensive track record of infrastructure projects and (iii) strong support from parent-co. Around 20% of its construction orderbook has built in cost escalation clause.

Source: Hong Leong Investment Bank Research - 4 Jul 2022

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