Contractors under our coverage delivered a superb 1QCY24 with their results either meeting or beating our expectations. The sector’s earnings should improve further throughout the year as works progress gathers momentum, while new jobs keep coming in. The expectation of a strong contract flow has prompted us to raise our job win assumptions for GAMUDA (OP; TP: RM6.70), SUNCON (OP; TP: RM3.85), and KIMLUN (MP; TP: RM1.47) while IJM (OP; TP: RM2.77) ended FY24 with job wins that surpassed our assumption. Our top pick for the sector is GAMUDA.

Contractors under our coverage delivered a superb quarter with IJM’s FY24 (FYE: Mar) results beating our forecast owing to strong performance from Kuantan Port backed by tariff hikes, while the 1QFY24 results of all its peers under our coverage met our expectations. This compares with 50%/33%/17% of companies under our coverage beating, meeting and missing our forecasts in 4QCY23.

GAMUDA’s 1HFY24 core profit only grew 2% YoY, despite doubling in revenue, due to a lower blended construction margin on low-margin overseas jobs which were mostly at the initial stage of implementation. Meanwhile. SUNCON’s 1QFY24 core profit rose by a slower 4% YoY, despite a 16% hike in revenue, due to the doubling of its finance cost, largely to fund its projects in India. KERJAYA’s (MP; TP: RM1.90) 1QFY24 core profit rose 14% YoY on a 13% hike in revenue on higher billings from construction as well as new property project namely The Vue @ Monterez. KIMLUN’s 1QFY24 barely broke even as its new construction projects were still at early stages of execution while WCT’s (OP; TP: RM0.66) 1QFY24 core loss narrowed YoY on improved construction margins after adjustments for work prolongation and escalation in input and labour costs previously.

Strong contract flow. GAMUDA has secured three sizeable contracts since Apr 2024 comprising data centre packages (RM1.74b), segment 1 civil work of the Penang LRT Mutiara Line (c.RM4.6b-RM5.0b) and a high-capacity signalling project in Perth, Western Australia. With its YTD FY24 contract wins of RM15.1b to RM16.0b being on track to surpass its job win target and our assumption of RM25b over two years in FY24-FY25, we raise our job wins assumption for the period to RM27b. SUNCON also secured a RM748m data centre job in Cyberjaya and an extra RM1.5b data centre job for Yellowwood in Johor, boosting its YTD job wins to RM3.3b prompting us to raise our job win assumption to RM4.5b from RM3.5b previously. IJM has secured a total of RM3.73b new construction jobs in FY24, surpassing our assumption of RM3b. It has set a target of RM5b job wins in FY25. YTD, KERJAYA has secured six new jobs worth a total of RM978.7m, on track to meet its FY24 job win target of RM1.5b while KIMLUN has also secured a total of RM660.9m new contracts, against our FY24 job wins assumption of RM900m.

Strong prospects. We remain bullish on the sector’s outlook on the back of the impending roll-out of mega infrastructure projects such as MRT3, Pan Borneo Phase 2 and flood mitigation projects, as well as private-sector building jobs underpinned by massive investment in new semiconductor foundries and data centres. Our sector pick is GAMUDA for: (i) being the front-runner for the tunnelling job for the MRT3, (ii) garnering a slice of action in the lucrative data centre building sector and positioned for more, (iii) its ability to secure sizeable jobs in overseas markets, (iv) its strong earnings visibility underpinned by a record outstanding order book of RM25.8b (excluding Upper Padas Hydro, Penang LRT and HCS projects), and (v) its inroads into the renewable energy space.

We maintain OVERWEIGHT for the construction sector.

Source: Kenanga Research - 13 Jun 2024