• We expect mega infrastructure projects to be revived in 2021 including the Klang Valley MRT Line 3 (MRT3) and KL-Singapore High Speed Rail (HSR).
• We expect the government to pump-prime the economy to support GDP growth of 6% in 2021E through higher infrastructure spending.
• We upgrade our call on the Construction Sector to NEUTRAL from Underweight as order book replenishment prospects are improving. Top sector BUYs are Gamuda, Sunway Construction (SunCon), HSS and AME. But the key downside risk for the sector is political uncertainties.

Worst Is Over for Construction Earnings

We believe construction sector earnings hit a trough in 2Q20 with an aggregate core net loss of RM44.7m. The impact of the government’s Movement Control Order (MCO) was mostly felt in 2Q20 as most construction sites stopped work for about 2 months from mid-March to mid-May. We expect construction earnings to rebound in 3Q20 as progress billings accelerate with the resumption of construciton works up to 80-90% efficiency for ongoing mega infrastructure projects, such as the MRT2 and Klang Valley Light Rail Transit Line 3 (LRT3). The 225% qoq jump in Gamuda’s core net profit to RM131m in 4QFY20 (July year-end), the main contractor for MRT2), indicates the extent of the potential earnings rebound for the sector in 3Q20.

Likely Revival of Mega Infrastructure Projects

We believe the MRT3 project will be revived at a lower construction cost of RM21- 22bn (compared to RM45bn when tenders were called in 2018). The project could be included in the upcoming Budget 2021 announcement on 6 November 2020. The government-to-government agreement to implement the HSR project will need to be finalised by end-2020 given the final extension granted by the Singapore government. We believe both the MRT3 and HSR projects will likely be included in the 12th Malaysia Plan (12MP) in 2021-25.

Upgrade Call to NEUTRAL With Selected BUYs

We expect construction sector core earnings to contract 27% yoy in 2020 due to disruptions caused by the Covid-19 pandemic. Core earnings should rebound by 9% yoy in 2021E as progress billings accelerate to catch up on work schedules. We upgrade our call on the sector to NEUTRAL from Underweight as prospects to replenish order books are improving with the potential revival of mega infrastructure projects. Top sector BUYs are Gamuda, SunCon, HSS and AME. We swapped Taliworks with HSS as our top small-cap pick and added Gamuda as our large-cap pick following our recent upgrade to BUY. Key upside risk is the faster-thanexpected roll-out of infrastructure projects and downside risk is political uncertainties that could dampen sentiment on the sector due to changes in government policies.

Source: Affin Hwang Research - 28 Sept 2020