• Top Picks: Sunway Construction (SCGB), Kerjaya Prospek (KPG) and Gabungan AQRS (AQRS). We believe the absence of new large infrastructure projects in the pipeline – aside from the Mass Rapid Transit 3 (MRT3) – may continue to dampen investor sentiment. Private jobs have seen some growth momentum, but this is not enough to revive the whole sector, given the jobs’ smaller sizes and shorter tenures. Maintain NEUTRAL on sector.

• Job flow trends. In 1Q23, the total value of projects awarded to contractors stood at MYR25.1bn (-38% QoQ, -20% YoY) – the lowest quarterly figure since 3Q20, indicating the sluggish pace of new jobs being awarded after the 15th general election (GE15). Our preliminary estimates show that the development expenditure (DE) in 2024-2025 could be flattish (at c.MYR83.6bn in each year), even as the Government aims to meet its DE target of MYR400bn under the 12th Malaysia Plan (12MP).

• The MRT3 waiting game. While this project may proceed, albeit with a possible MYR5bn reduction in overall costs from the initial MYR50bn, the timeline uncertainty remains a point of concern for contractors, especially subcontractors. In our view, MRT3 civil contracts are likely to be rolled out sometime in 4Q23. This is after taking into consideration the cost review, the 3-month public inspection period, and the final approval from the Government. Subcontractors would then need to wait another few months after the awarding of the main civil work packages to the main contractors.

• Industrial building jobs may be a sweet spot for the sector, given the 25% YoY growth in industrial property transactions. However, we remain cognisant of the limited multiplier effect of industrial building jobs – given their usual smaller contract value and shorter tenures (with the exception for certain jobs such as data centres undertaken by SCGB and KPG’s factory), compared to the large mega infrastructure projects that could provide more opportunities across various categories of contractors over a longer timeframe.

• Top Picks. We like names from the small- and mid-cap construction space such as KPG, SCGB and AQRS. Overall, we believe they can weather the sector headwinds stemming from the lack of public mega infrastructure projects. KPG has a framework arrangement with Samsung C&T which should enable it to be exposed to more private sophisticated jobs (backed by its net cash pile). We also favour SCGB for its diverse tenderbook, which consists of internal jobs together with data centres and factories, in addition to the Song Hau 2 Power Plant project (pending financial close) in Vietnam – which may boost its orderbook by c.MYR6bn. Meanwhile, AQRS, via its 49% owned precast business in Sabah, may likely benefit from the remaining packages of Pan Borneo Highway Sabah.

• Upside/downside risks to our sector call include the faster-than-expected revival/outright cancellation of the Kuala Lumpur-Singapore High Speed Railway (KL-SG HSR), smaller/larger cost reductions in MRT3 costs, and cheaper/higher raw material prices.

Source: RHB Research - 20 Apr 2023