While the recent HSR termination is a negative development, we view it as a temporary setback and remain OVERWEIGHT on Construction as we foresee the Covid-19 recovery theme to grow in prominence in 2021 which would set the narrative for amplified share price reaction upon news flows amid a liquidity-filled market. Key predictions and themes we have for 2021 are:-

(i) Higher property development launches to benefit building contractors.

(ii) Small caps to outperform big caps in share price performance due to tighter floats.

(iii) Potentially another 1,200MW large scale solar (LSS) award post LSS4.

(iv) LRT3 earnings to kick in strongly.

(v) Election a major impetus to the sector if a majority government is elected.

Our top picks for the sector are MRCB (TP: RM0.675), Kerjaya (TP: TM1.50), and Suncon (TP: RM2.45).

4QCY20 review. 4QCY20 saw construction counters rising in line with the broad recovery theme. KLCON gained 13% in 4QC20 as Covid-19 hit sectors’ stock prices recovered. However, on a relative basis, KLCON still underperformed other sectors in terms of percentage as tabled below.

HSR termination a negative ripple to the pipeline of future projects; but not all is lost. Malaysia and Singapore have finally reached a consensus to cancel the High Speed Rail (HSR) mega project as a common agreement was not reached before the due date of 31st Dec 2020. We are negative on this development as: (i) the absence of HSR would affect the project’s visibility pipeline in the medium term and (ii) many developments surrounding the HSR alignment may now take a longer gestation period to materialise i.e. Bandar Malaysia.

However, we note that there is a flipside to this and it may not be as bad as it seems. Without the HSR, we note that the government’s fiscal purse would be less tight freeing higher allocations to other high impact projects i.e. MRT3. Recall that back in 2018, MRT3 had a tentative price tag of RM45-60b. However, due to concerns of government finances, the quoted price tag had since been halved to c.RM20b – on reduced scope and coverage. Hence, if the terminated HSR’s budget were to be rechannelled to MRT3, we will view it positively as we believe MRT3’s impact post-completion would be more immediate and effective to the economy compared to the HSR.

However, we note that there is a flipside to this and it may not be as bad as it seems. Without the HSR, we note that the government’s fiscal purse would be less tight freeing higher allocations to other high impact projects i.e. MRT3. Recall that back in 2018, MRT3 had a tentative price tag of RM45-60b. However, due to concerns of government finances, the quoted price tag had since been halved to c.RM20b – on reduced scope and coverage. Hence, if the terminated HSR’s budget were to be rechannelled to MRT3, we will view it positively as we believe MRT3’s impact post-completion would be more immediate and effective to the economy compared to the HSR.

Our prediction and themes for 2021

We believe the Covid-19 recovery theme will grow in prominence, providing a conducive sector backdrop – in terms of consumer confidence and market liquidity. This will continue benefitting sectors which were hit by Covid-19 and we believe that the construction sector being a laggard as measured by its 4Q performance would likely play catch-up and outperform in 2021.

We believe 2021 would set the right context for amplified share price reaction upon news flow. Currently, most contracts have yet to materialise, providing room for news flow anticipations and speculations in 2021. Case in point, news on the RM4b Rasau Water Treatment Plant tender in the Edge’s feature article on the 18th of December 2020 triggered a material surge in share prices for water related contractors i.e. Puncak, Taliworks, Salcon. Also, news flow on potential LSS4 awards on the 3rd week of December (14th – 18th Dec) spurred a rally amongst solar players (Samaiden, Cypark, Solarvest, Kpower) in the weeks prior. These examples provide a prelude of potential rally for contractors in 2021 as we believe market dynamics will remain unchanged with the lower-for-longer interest rates continuing to provide liquidity in our capital markets. We believe news flow/contract awards which could spur excitement in 2021 are LSS4, RTS, ECRL, MRT3, Penang reclamation, Pan Borneo Sabah and Sabah Sarawak Link Road.

Source: Kenanga Research - 4 Jan 2021