• Top Picks: Kerjaya Prospek and Sunway Construction. The total value of construction work done in 2Q22 reached MYR29.9bn (+6.1% YoY, +1.5% QoQ). In the same period, the economic output of the construction sector grew 2.4% YoY, marking the first YoY expansion since 3Q21. Nevertheless, we consider that labour constraints could remain in 4Q22 with contractors awaiting for the approval and arrival of foreign workers, putting a lid on hastened progress billings. We remain NEUTRAL on the sector.

• Overall, 2Q22 results were below expectations. Five companies reported below and four were in line with expectations. Construction revenue of several companies did pick up in 2Q22 YoY, but was slightly sluggish QoQ amid the shortage on manpower which started to impact work progress at sites, in addition to pressures from high building material prices. Consequently, during the latest reporting season, we cut FY22-23F earnings by 7.5% and 3.8%.

• Pump-priming likely to be on a smaller scale. The Government’s limited fiscal headroom is evident from the ratio of government debt to GDP of 63.8% at the end of Jun 2022 (end Dec 2021: 63.4%). As such, a pre- election pump priming theme could materialise but may be skewed more towards smaller scale contractors. Large-scale projects could still be announced but would need private funding arrangements. However, the risk of low private sector construction participation could increase if contractors, with previously strong balance sheets, could no longer accommodate such funding requirements if they take up more projects further down the road.

• Possible overhang as the general election approaches. De-risking activity could intensify as we approach closer to the upcoming general election with market talk suggesting that the 15th General Election (GE15) could happen as early as 4Q22 after the tabling of the 2023 budget was brought forward to 7 Oct (from 28 Oct). Nevertheless, re-rating catalysts for the sector could arise after GE15. Assuming no substantial changes in policies take place post GE15, such situation could bode well for ongoing and future project implementation. A negative outcome would be a hung Parliament, which could fuel uncertainty for sector prospects.

• Top Picks. We like names from the small and mid-cap construction space such as Kerjaya Prospek and Sunway Construction. Overall, we believe they have supportive catalysts, 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 - 9 Sep 2022