We maintain OVERWEIGHT on the construction sector. There was a slight sequential deterioration in earnings delivery (against our expectations) by the sector in the recently-concluded 2QCY23 results. However, the sector’s earnings should improve in 2HCY23 as work progress gathers momentum. Also, the job flow should pick up in 2HCY23 underpinned by the roll-out of MRT3, Penang LRT, various flood mitigation projects, and other public infrastructure projects earmarked for implementation under Budget 2023, as well private-sector building jobs particularly for new semiconductor foundries and data centres. Our top picks for the sector are GAMUDA (OP; TP: RM5.15) and SUNCON (OP; TP: RM2.12).

A tad weaker. There was a slight sequential deterioration in earnings delivery (against our expectations) by the sector in the recently-concluded 2QCY23 results, with 67% and 33% coming within and below our forecasts, respectively, as opposed to 17%, 67% and 17% for results above, within and below, respectively, in the preceding quarters. SUNCON’s results disappointed due to a slower-than-expected pickup in its construction work progress and weaker margins while KIMLUN’s (MP; TP: RM0.82) performance was weighed down by cost pressures at both its construction and manufacturing divisions. The results of other construction players undern our coverage met our expectations.

The market did not set a high bar in 1H... GAMUDA was buoyed by progress billings from projects in Australia and Taiwan. IJM’s (MP; TP: RM1.75) improved top line was negated by higher interest expenses and tax, and the reversal of deferred tax assets. Meanwhile, SUNCON disappointed as its key new projects were still at initial stages of implementation. On the other hand, KERJAYA (OP; TP: RM1.53) reported a significant pickup in construction works. WCT (OP; TP: RM0.61) reported a sharp drop in earnings from a high base a year ago (boosted by lumpy land sales) while KIMLUN barely broke even amidst cost pressures at both its construction and manufacturing segments.

...but has higher expectations in 2H. The market, ourselves included, expects a stronger 2H as work progress gathers momentum, coupled with: (i) the roll-out of the RM45b MRT3, and RM9.5b Penang MRT projects and six flood mitigation projects reportedly to be worth RM13b, and (ii) an accelerated disbursement of the massive RM97b gross development expenditure budgeted under Budget 2023 (+35% YoY over RM71.6b a year ago). Similarly, there are opportunities in private-sector building jobs underpinned by massive investment in new semiconductor foundries and data centres. Our sector picks for the sector are GAMUDA and SUNCON. Maintain OVERWEIGHT.

Source: Kenanga Research - 7 Sept 2023