9M22 domestic contract awards totalled RM12.6bn (-4% YoY). 3Q22 saw a spike driven by Rasau (RM1.97bn), RTS (RM2.70bn) and MRT3-PMC (RM998m). Private sector jobs trended lower on volatile swings in materials prices, labour shortage and weak sentiment. The same reasons can be attributed for YTD declines (-4%). Going into the final quarter of 2022, unless MRT3 contracts flow out, 4Q22 could be quiet. While the submission deadline was extended, we gather that awards may not necessarily be delayed. We retain our sector NEUTRAL weight due to earnings delivery risks from labour shortage and high labour & materials costs. We continue to expect sector coverage earnings to recover this year due to low base in 2021 but we do note concerns over still acute labour shortage situation. Preferred pick remains SunCon (BUY, TP: RM1.90).

Strong in 3Q22. Domestic contract awards to listed contractors totalled RM8.1bn in 3Q22 (+255% QoQ, +96% YoY). After a snail’s pace ~RM2bn domestic awards per quarter in 1H22, contract awards in 3Q22 surged by more than three-fold bolstered by Rasau Water Scheme (RM1.97bn), JB-SG RTS (RM2.70bn) and MRT3 - PMC package (RM998m). Going forward, RTS is expected to generate smallish contracts while upcoming MRT3 contracts could assuage a starving sector. Private sector contracts trended lower with two consecutive quarters of sequential decline which we attribute to volatile swings in materials prices, labour shortage and weak sentiment. In fact, there is also pick-up in mutual contract terminations in 3Q22 due to rapid cost escalation, rendering projects unviable. On YTD basis, despite the surge in 3Q22, domestic contract awards were marginally lower by -4% with weakness in 1H22 a big dampener on numbers due to reasons highlighted above. Without MRT3 civil contracts coming in, we expect weaker 2022 numbers (vs 2021).

Notable contracts. Notable contract wins in 3Q22 include (i) EPC contract for RTS to Ekovest (RM1.98bn), (ii) Rasau Package 1 to Gamuda (RM1.97bn) and (iii) MRT3 PMC package to HSS (RM998m).

Foreign jobs. There were no foreign contracts secured during the quarter. We reckon domestic contractors dialled back on efforts overseas to focus on MRT3 tenders.

4Q22. Going into the final quarter of 2022 unless MRT3 contracts flow out, 4Q22 could turn out quiet. While the submission deadline for civil packages was extended to 30-Sept recently, based on channel checks, awards might still be on track for 4Q22. Civil subcontracts should still trickle out in 1Q23 post-award of main packages. In our view, delays may have been brought by confusion over shareholding rules and possible impact of rate hikes on financing. As for other public infra projects, possible GE15 and/or flash floods (according to MetMalaysia) could dent awards activity in 4Q22. Besides this, we continue to expect contracts from Kuching ART to trickle out along with other road projects in Sarawak. Nonetheless, these are not necessarily secured by listed contractors. The EIA approval for the PSI according to the project proponent is expected in Oct-22 and the reclamation contract of RM6-7bn could still spring an upside surprise. On the private sector side, we expect things to remain weak with various uncertainties, potential GE15 amongst other to dent sentiments.

Maintain Neutral. We retain our sector NEUTRAL weight due to earnings delivery risks from labour shortage and high labour & materials costs. We continue to expect sector coverage earnings to recover this year but remain concern over still acute labour shortage situation. Majority of earnings disappointment were due to labour shortages. Sector valuations are fair trading at 12.2x forward P/E (near 5 year mean) and 0.7x P/B.

Preferred pick. We prefer SunCon (BUY, TP: RM1.90) 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. Aside from the upcoming MRT3, the company could also benefit from increased LRT3 scope as its existing package is nearly done (>90%).

Source: Hong Leong Investment Bank Research - 4 Oct 2022