Year-to-date, listed companies have clinched a total worth of RM10.1b, (-9%, YoY) works. That aside, it does not bode well for sentiment in the construction sector due to call for the highly anticipated ECRL to be relooked, by one of the members of the Council of Eminent Persons, Prof. Jomo. Furthermore, there are delays in the JB-Singapore RTS link project on which the decision of whether to proceed or otherwise has been deferred, from Sep 2019 to Oct 2019. KLCON is trading at 1-year Fwd. PER of 12.8x - down from 13.4x as compared to our 3Q19 strategy performance. It is slightly below its 10-year average level of 13.2x. That aside, PER trading discount between KLCON to KLCI has also widened from -22% (-0.5SD levels) to - 23.2%, in-line with our UNDERWEIGHT recommendation. Recently, we upgraded GKENT from MP to OP with an unchanged TP of RM1.15, and also KIMLUN from MP to OP with an unchanged TP of RM1.35 due to the recent retracements in share prices. Calls and TPs for the others remain unchanged.

Share prices weakening. At our report cut-off date of 20 Sep 2019, we saw profit taking activities which explains the 7.4% drop in share price performance as compared to the last quarter which registered a positive return of 9.3%. We were not surprised with the decline in share prices due to the uninspiring outlook in the construction scene, in-line with our UNDERWEIGHT call for the sector.

Results review. For 2QCY19, we saw better performance from the contractors with only 1 disappointment, 1 above expectations, compared to 3 disappointments in 1QCY19 out of 10 stocks under our coverage. The remaining came in within expectations. MITRA was the only stock that came below expectations due to high fixed overheads, decline in revenue on slower billings and lack of new jobs. YoY, the bulk of the contractors’ CNP was down by between 9.6%-47.8%, with MITRA slipping into losses, except for HSL, KERJAYA, and KIMLUN which registered growth of between 5.2%-30.7%, driven by better billings progress backed by the growth in order-book size in recent years. (Note that GKENT and GAMUDA have odd financial year ends and the results review does not reflect recent results).

Unexciting outlook. Year-to-date, listed companies have clinched a total worth of RM10.1b, (-9%, YoY) works. That aside, it does not bode well for sentiment in the construction sector due to call for the highly anticipated ECRL to be relooked, by one of the members of the Council of Eminent Persons, Prof. Jomo. Furthermore, there are delays in the JB-Singapore RTS link project on which the decision of whether to proceed or otherwise has been deferred, from Sep 2019 to Oct 2019. Hence, we maintain our view that contract flows in 2HCY19 could be slower than 1HCY19 if contract awards from KVDT and ECRL commences only in 2020, bringing total awards to <RM16.0b for 2019. Nonetheless, Budget 2020 is
highly anticipated which we hope the government will revive mega infrastructure projects like MRT3 and High-Speed-Rail.

Source: Kenanga Research - 4 Oct 2019