Highlights

• Pretty strong start. Domestic contract awards to listed contractors in 1Q15 stood at RM4.1bn (+160% YoY, -57% QoQ). This is a rather strong showing considering that historically, 1Q tends to be the slowest quarter due to the Lunar New Year festivities. The steep -57% QoQ decline was expected given the high base in 4Q14 at RM9.7bn (2nd highest quarter since 2008).

• IJM hits it big. Notable contract awards during the quarter include IJM bagging the Kuantan Port (RM1.2bn) and Puteri Cove Residence in Johor Bahru (RM539m). Apart from that, most of the other domestic contracts were small to mid-sized ones, averaging RM110m.

• Upside to our target. Currently, we have a RM15bn domestic job wins target for 2015 (2014: RM17.9bn) as we anticipate a decline this year, before picking up again in 2016 when the MRT Line 2 kicks off. However, judging from the strong showing in 1Q15, there appears to be an upside potential to our target.

• Jobs for the year. Potential contracts that could materialise this year include LRT3 (RM9bn), certain stretches of the Pan Borneo Highway (RM27bn), Warisan Merdeka (RM3bn), WCE open tender portion (RM2bn), SUKE (RM4bn), DASH (RM4bn), SKLIA (RM2bn) and Kwasa Damansara civil works (RM1bn).

• Foreign contracts surge. Foreign contract awards stood at RM2bn in 1Q15 marking both a 250% YoY increase and significant jump QoQ given the low base last quarter (only RM47m). The key contributions came from WCT securing the Lusail Project (RM1.2bn) in Qatar and Eversendai bagging RM743m worth of structural steel works in the Middle East and India.

Risks

• At this juncture, we feel that the key risk for the sector would be a slowdown in the domestic property cycle. This would lead to slower private sector contracts as developers scale back on launches.

Rating

• OVERWEIGHT
• Our data on contract awards indicates that the momentum of job wins remains strong for contractors. The current low oil price environment should also help keep material costs at bay. We retain our OVERWEIGHT stance on the sector, with the unveiling of the 11MP in May being the next catalyst to watch out for.

Top Picks

Following our recent downgrade of Gamuda (HOLD, TP: RM5.30), IJM (BUY, TP: RM7.92) is now our top pick amongst the large cap contractors. Job wins have been superb in the past 12 months with RM5.7bn secured. The privatisation of IJM Land will also help plug the MI leakage.

• For the small caps, we like Mitrajaya (BUY; TP: RM1.97) which will see strong earnings growth, backed by its superior orderbook cover of 5x. The market has also overlooked the value of its landbank.

Source: Hong Leong Investment Bank Research - 2 Apr 2015