The contract awards for the Light Rail Transit Line 3 (LRT3) accelerated with close to RM4bn worth of new contract awards to Sunway Construction (Suncon), WCT and Gabungan AQRS. New contract wins is in line with our 2017 expectations for WCT and AQRS but above our expectations for Suncon. We reiterate our HOLD call on Suncon and BUY calls on WCT and AQRS. We remain OVERWEIGHT on the construction sector as new contract flows will remain strong in 2017-18. Our top BUYs are Gamuda, WCT and HSS.

Acceleration in LRT3 Contract Flows

The LRT3 contract flows accelerated with the award of RM3.96bn new contracts for elevated viaducts, stations and ancillary facilities to Suncon (RM2.18bn), WCT (RM0.64bn) and AQRS (RM1.14bn). This brings total contract awards for LRT3 to date to about RM7.4bn, out of an estimated total project cost of RM10bn. We expect the remaining 5 major civil work packages for LRT3 to be awarded in 4Q17.

WCT Is a Big Winner

WCT won 3 packages for the LRT3 project to date totalling RM1.67bn, which highlights the company’s competitiveness in winning the bids. With the additional LRT3 package secured, the 2017 new contracts assumption in our earnings forecasts has been met. We assumed RM1.4bn in new contracts for AQRS in 2017 for our earnings forecast. 81% of our new contracts assumption has been met with the RM1.14bn LRT3 package secured. There is potential upside for new contract wins if its partner Syarikat Muhibbah Sdn Bhd wins the tender for a LRT3 Bumiputera package, which has yet to be awarded.

Suncon Exceeds New Contract Target

Suncon’s LRT3 package is the largest portion of the LRT3 project at RM2.17bn, which combines Package GS07-08. A complicated project as it involves the construction of an iconic cable-stayed bridge across a highway and a tight construction period of 36 months. This contract lifts Suncon’s order book to a record high of RM6.5bn. With new contracts worth RM3.54bn secured YTD (including the RM582m PPA1M housing contract), this has exceeded our RM3bn new contract assumption in 2017.

Remain Overweight

We are Overweight the construction sector as news flow on contract awards for the RM55bn East Coast Rail Link (ECRL) project, which is expected to start in 4Q17. We see more value in small/mid-cap names like WCT and HSS. In large caps, we prefer Gamuda over IJM.

Source: Affin Hwang Research - 6 Oct 2017