Infrastructure Spending Pick Up

Public-sector civil works done by contractors are picking up, growing 3.4% yoy to RM16.6bn in 3Q19. However, the LRT3 project works only resumed in 2H19 for some of the subcontractors. Hence, we expect aggregate construction earnings to rebound in 3Q19 from a low base in 3Q18 post-general election. During our recent analyst marketing in Singapore, we gather that foreign investors are concerned about the government policy risks in Malaysia and Gamuda’s ability to replenish its order book. We remain OVERWEIGHT the Construction Sector. Top BUYs are AQRS, Gamuda, SunCon and Pintaras.

Better 3Q19 Earnings

We expect aggregate construction core earnings to see a recovery in 3Q19 with higher progress billings for ongoing projects. There will also be the low base effect for yoy comparison as sector core earnings contracted 27% yoy in 3Q18 due to the stalling of some projects as the new government renegotiated the contracts to reduce cost.

Foreign Investor Concerns

We met with 13 investors from 9 institutional fund management companies during our recent analyst marketing on the market, construction and Electronics Manufacturing Services (EMS) sector outlook. Most were concern about the political uncertainties on leadership succession, government policy risks on construction and concession contracts, and Gamuda’s ability to replenish its order book. We believe the government will maintain the sanctity of government contracts so as not to disrupt the capital markets.

Contract Awards to Pick Up in 2020

We believe public-sector contract awards will pick up in 2020. East Coast Rail Link (ECRL) subcontracts to be awarded to Malaysian contractors will start in 1Q20. More packages for the Pan Borneo Highway Sabah will also be rolled out. Other large-scale projects such as the Klang Valley MRT Line 3, Penang Transport Master Plan and KL-Singapore High Speed Rail (HSR) could see news flow on potential revival in 2020.

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 in order of preference. Other sector BUYs are AME Elite Consortium, HSS Engineers and Taliworks.

Source: Affin Hwang Research - 18 Nov 2019