2022 domestic contract awards totalled RM18.6bn (-4% YoY). Things were weaker on a sequential basis (-26% QoQ) resulting from higher base in 3Q22 which saw some awards from high impact projects. 4Q22 exhibited noticeably higher contribution from factory/industrial-type projects. The much anticipated MRT3 civil contracts ultimately did not materialise in Dec-22 due to GE15. In 2023, picture remains unclear though we expect crystallisation of opportunities once Budget 2023 is tabled in Feb-23. Focus is likely in flood mitigation, healthcare/hospitals, water and various infra projects in Sabah & Sarawak. Our base case for the MRT3 is a cost review. Maintain NEUTRAL with top picks being Gamuda (BUY: TP: RM4.15) and SunCon (BUY; TP: RM2.06).

Polls impacting job rollouts. Domestic contract awards to listed contractors totalled RM6.0bn in 4Q22 (-26% QoQ, -5% YoY). The sequential weakness is largely expected considering 3Q22 was boosted by high impact project awards like the RTS, Rasau WTP and MRT3-PMC. Contract awards in 4Q22 could have seen some delays from election uncertainties with both public and private sector contract awards held back until post GE15. Taking a closer look at 4Q22 awards, we saw a noticeable pickup in factory/industrial-type contracts awarded by global MNCs. It is comforting to see domestic contractors successfully pivoting to capitalise on growing opportunities in manufacturing plants and data centres. Meanwhile on a full year basis, value of contract awards in 2022 finished slightly lower by -4% YoY; we attribute this to volatile costs and absence of pump priming. The much anticipated MRT3 contracts ultimately did not materialise in Dec-22 due to elections.

Notable contracts. Notable contract wins in 4Q22 include (i) construction of Texas Instruments factory to Samsung-Kerjaya JV (RM1.45bn), (ii) construction of Kapar hospital to IJM-Ganda JV (RM831m) and (iii) construction of a mixed development to Crest Builder (RM478.9m).

Foreign jobs. Several notable foreign contracts awarded during the quarter are: (i) M1 Motorway package to John Holland-Gamuda JV (RM3.0bn) ii) TaoYuan Underground Railway package to Gamuda-AWEC JV (RM2.13bn) and iii) various piling jobs in SG to Pintaras Jaya (RM192m).

2023. In 2023, the picture remains unclear though we expect crystallisation of opportunities once Budget 2023 is tabled on 24 Feb. Our economics team reckons there could be a possible curtailment in DE from the earlier high of RM95bn which was tabled prior to GE15 (unapproved). The possible revised DE number could come in at ~RM85bn inclusive of USD3bn 1MDB bond repayment. This would translate to flattish “clean” 2023 DE vs projected 2022 DE of RM71.8bn. We expect the bulk of DE focus in the upcoming budget to centre on flood mitigation, healthcare/hospitals, water and various infra projects in Sabah & Sarawak. Our base case for the MRT3 is a review but no cancellation. Given the late tabling and approval, we think there is higher DE implementation risk this round.

Maintain NEUTRAL. We make no changes to our NEUTRAL sector weight for 2023. Post GE15, there is uncertainties over the timing of mega infra rerating catalysts. Meanwhile, our cumulative CY23 earnings forecasts see growth at a muted 2.8%. Despite this, sector valuations are undemanding with 12.3x forward P/E (5 year mean) and 0.6x P/B (-1SD 5 year range). Key catalysts include MRT3 news flow and contract wins. Risks: MRT3 cancellation, prolonged elevated materials prices, labour shortage and political instability. Our top picks are Gamuda (BUY; TP: RM4.15) and SunCon (BUY; TP: RM2.06) due to their lower reliance on domestic public infra spending.

Source: Hong Leong Investment Bank Research - 9 Jan 2023