• Top Picks: Kerjaya Prospek and MGB. Improved human mobility resulted in a higher value of construction work done of MYR29.5bn in 1Q22, representing a 7% QoQ expansion. In the same period, the economic output of the construction sector grew by 2.4% QoQ to MYR12.9bn, marking the second QoQ expansion since 3Q21. Notwithstanding this, headwinds in the form of escalating raw material prices and a persistent labour shortage continue to linger, adversely impacting construction progress and crimping profit margins. Remain NEUTRAL on the sector.

• 1Q22 performance. Overall, 1Q22 results were below expectations – seven companies reported numbers that disappointed, one was in line with expectations, and one exceeded expectations. Construction revenue of certain companies did pick up in 1Q22 but was negated by higher raw material prices. Steel bar prices increased 16% YoY, while bulk cement prices were up 40% YoY in 1Q22. Consequently, we trimmed FY22F-23F sector earnings by 1.3% and 2.5%.

• Private funding initiatives the way forward. The Government’s limited fiscal headroom is reflected in its debt-to-GDP ratio, which stood at 62.4% as at end April (end Dec 2021: 63.4%). As such, we cannot discount that future public infrastructure projects could require more private sector participation, benefitting contractors with lean balance sheets. However, there is a risk of low private sector construction participation if the contractors experience funding limitations as they take up more projects.

• Possible overhang as general election comes nearer. We foresee heightened volatility as we approach the 15th General Election (GE15) that could happen as early as 2H22. Nevertheless, re-rating catalysts for the sector could arise after the general election. Assuming the next government maintains policy continuity, this could bode well for ongoing and future project implementations. A negative scenario would be a hung parliament which could fuel uncertainty for big ticket public sector projects going forward.

• Top Picks. We continue to advocate names from the small and mid-cap space like Kerjaya Prospek and MGB. Overall, we believe they have supportive catalysts to buffer near-term risks, supported by stable orderbook replenishment rates and robust balance sheets.

• Upside/downside risks to our sector call are shorter-than-expected/longer-than-expected delays in progress works, success/failure in securing new orders, and cheaper/higher raw material prices.

Source: RHB Research - 8 Jun 2022