We jointly hosted a Construction Corporate Day event with Bursa Malaysia featuring Gabungan AQRS, Kimlun Corp and Sunway Construction (SunCon) this week. We also met IJM Corp and Gamuda’s management for an update. Construction activities remain slow due to the weak property market and slow award of public sector projects. But, most contractors are optimistic of more public sector projects to be implemented under Budget 2020 to be announced on 11 October. We remain OVERWEIGHT on the Construction Sector. Top BUYs are Gamuda, SunCon, AQRS and Pintaras.

MRT3 Revival?

We believe that the government is looking to revive the Klang Valley MRT Line 3 (MRT3) project. The Circle Line will integrate the existing MRT and Light Rail Transit (LRT) lines as well as new lines being built, ie, the MRT2 and LRT3, in the Klang Valley. We believe the government could announce plans to revive the project in Budget 2020. This will kick start the process to design and approve the railway scheme in 2020, in order for construction to begin in 2021. Gamuda has a competitive advantage in bidding for the MRT3 project given that it is the main contractor for Lines 1 and 2. Other potential beneficiaries are HSS, IJM Corp, SunCon and WCT for the stocks under our coverage.

ECRL Subcontract Awards Expected in 2021

We expect tenders for the East Coast Rail Link (ECRL) to be called starting in 4Q19 for local subcontractors to undertake 40% of the civil works (excluding tunnel works). The alignment for the 223-km stretch (out of a total length of 640 km) from Dungun to Mentakab called Package B has been finalised. AQRS is optimistic of securing a package for the ECRL Package B stretching 44-100 km, depending on the risk-reward of undertaking the subcontract works. Based on the estimated construction cost of RM27m per km, we estimate a RM1.2- 2.7bn value for the ECRL contract works that AQRS is vying for.

Positive Outlook Across the Causeway

The demand for construction services in Singapore from the public and private sectors is estimated at S$27-32bn in 2019. The Singapore government is increasing infrastructure spending and sustaining public housing development, while the private sector is driving private condominium re-development. This is positive for Malaysian pre-cast concrete product suppliers and contractors. We believe Kimlun (Not Rated), Pintaras and SunCon are the key beneficiaries.

Remain Overweight the Construction Sector

We believe the positive news flow of the resumption in government infrastructure spending supports an upward re-rating of the Construction Sector. We maintain our OVERWEIGHT call. Top BUYs are AQRS, Gamuda, SunCon and Pintaras.

Source: Affin Hwang Research - 26 Sept 2019