Malaysia Rail Link Sdn Bhd (MRL) will call for tenders for the RM44bn East Coast Rail Link (ECRL) project civil works in 4Q19. We believe more infrastructure projects are likely to be revived. We upgrade the Construction Sector to OVERWEIGHT from Neutral as we believe rising external risks will shift the focus to domestic-oriented stocks. We expect infrastructure spending to accelerate in 2020 to support GDP growth. We upgrade Gamuda to BUY from Hold as a large-cap sector proxy. AQRS, HSS and SCGB are our top small and mid-cap sector BUYs.

ECRL Tenders to be Called in 4Q19

MRL said 331 Malaysian construction companies have been shortlisted as potential tenderers for the ECRL civil packages, ie, 25% out of 1,321 companies that submitted applications for pre-qualification. All shortlisted companies are expected to be notified in writing before end-August 2019 by main contractor China Communications Construction Company Ltd (CCCC).

Most Contractors Under Coverage Are Likely to be Pre-qualified

We gather that AQRS (AQRS MK), Pintaras Jaya (PINT MK), WCT Holdings (WCTHG MK), WZ Satu (WENG MK), Sunway Construction (SunCon; SCGB MK) have been pre-qualified to tender for ECRL subcontract works among the companies under our coverage. We believe IJM Corp (IJM MK) and Malaysian Resources Corp (MRC MK) are likely to be pre-qualified given their established track records. We believe AQRS, SCGB, MRC, WCT and IJM could win civil packages for the ECRL. Tender packages will be issued for 40% of the civil works (excluding tunnel works) and would first involve the 223-km stretch (out of a total length of 640 km) from Dungun to Mentakab where the rail alignment had been finalized.

Other Infrastructure Projects to Kick Off

The Penang Transport Master Plan (PTMP) has been revived with the federal government’s approval of the RM7.5bn 19.5-km Pan Island Link 1 (PIL2), RM8.4bn 29.5-km Light Rail Transit (LRT) and Penang South Reclamation (PSR) components. Other large-scale infrastructure projects that could be revived in 2020 include the Klang Valley MRT Line 3 (MRT3) and Kuala Lumpur-Singapore High Speed Rail (KL-SG HSR) following a review to cut the project cost. The KL-SG Rapid Transit System (RTS), Johor Bus Rapid Transit (BRT) and Labuan Bridge are also being considered for implementation.

Upgrade Construction Sector to Overweight

The construction sector real GDP growth has outpaced Malaysian GDP growth in most years post-GFC, except 2011 and 2018 due to domestic political uncertainties. We expect the trend to resume with government pump-priming via infrastructure spending to support GDP growth in 2020, given rising external risks. We believe the positive news flow will sustain the upward rerating of the Construction Sector and upgrade our call to OVERWEIGHT from Neutral. Top BUYs are AQRS, Gamuda, SunCon and HSS.

Source: Affin Hwang Research - 7 Aug 2019