Investors will be waiting eagerly for the rolling out of major infrastructure projects in 2020 to lift construction stocks to higher levels. As at 20 Dec 2019, the KLCON Index was up 35.6% YTD, beating the key FBMKLCI’s negative return of 4.8%, with most of the gains chalked up in the first half of the year. Leading the way were large cap contractors Gamuda (+68.4% YTD), Sunway Construction (+42.1% YTD) and IJM Corporation (+36.4% YTD). At the same time, current valuations have already partially built in expectation of positive developments going forward. Reflecting this, the Bursa Malaysia Construction Index is presently trading at forward PER of 13.5x, which is hovering at 1SD above its 3-year historical mean. In terms of timeline, based on the pipeline of potential infrastructure projects to be revived, the major ones (such as HSR, MRT3) will probably take off only after mid-2020. Even for PTMP (which is scheduled to witness the signing of the PDP agreement in Jan 2020), the contract awards and physical construction works are expected to commence from the second half of 2020. Therefore, we reckon potential re-rating catalysts for the sector will likely gather momentum beyond 1QCY20. Our sector call is NEUTRAL with our top picks being Gamuda (big cap) and Kim Lun (small cap). Our target price for: (i) Gamuda is at RM3.90 (with potential upgrade upon the signing of the PTMP), and (ii) Kim Lun is RM1.65.

2020 a repeat of 2019? Will this year mirror last year as far as the performance of construction stocks on Bursa Malaysia is concerned? Back in 2019, share prices of construction companies made a significant rebound from their oversold positions as investors turned positive on hopes that the worst was already over for the sector. The Bursa Malaysia Construction Index jumped 35.6% (until 20 Dec 2019) with most of the gains posted in the first half. This was led by big cap contractors, namely Gamuda (+68.4% YTD), Sunway Construction (+42.1% YTD) and IJM Corporation (+36.4% YTD). For 2020, as expectations are building up for the government to stimulate the economy by rolling out major infrastructure projects, investors will be hoping the excitement will eventually translate to positive share price reactions on our local bourse.

Valuations check. To put things in perspective, most construction stocks are currently trading at elevated valuations following the sector’s strong performance last year. Reflecting this, the Bursa Malaysia Construction Index is now trading at forward PER of 13.5x, or 1SD above its historical mean. Investors are essentially holding out for further positive developments to take the construction shares to higher levels.

Major projects under watch. For the construction stocks to climb further, investors will be watching out for earnings catalysts from new contract wins. In particular, construction companies will be eyeing to replenish their order-books from the slew of potential infrastructure projects in the pipeline, as follow:

Source: Kenanga Research - 3 Jan 2020