• Maintain OVERWEIGHT. We remain upbeat on the sector given the latest news flow in relation to the Kuala Lumpur-Singapore High Speed Rail (HSR). East Malaysia is also progressing well on infrastructure projects such as the state funded Kuching Autonomous Rapid Transit (ART). Potential near-term catalysts include the retendering of Johor Bahru- Singapore Rapid Transit System (RTS) link packages and the approval for a Light Rail Transit (LRT) connecting Penang Island to Seberang Perai. Our Top Picks are Gamuda, Sunway Construction and Kerjaya Prospek.

• The number of new applications for construction personnel in the country reached 151.5k applications in 1H23 based on the Construction Industry Development Board’s data. This is 66% of last year’s figure, in line with higher job flows from the private sector valued at MYR39bn vs the public sector’s MYR9bn for 1H23. Notwithstanding this, awards from the public sector are expected to gain momentum post state election in August (assuming the status quo) – which may include the Bayan Lepas Light Rail Transit and possibly Mass Rapid Transit 3 (MRT3) which saw its tender validity period being extended to end September from end June.

• HSR, a fresh canvas for contractors to paint on. Previously in March, only five companies (Malaysian Resources Corp, WCT Holdings, YTL Group, Berjaya Group and MMC Corp) were invited for the request for information (RFI) exercise. MyHSR Corp has now invited interested parties to participate in the latest round of the RFI exercise for the HSR project from 12 Jul until 15 Nov. As such, we view the latest move to be positive – giving opportunities to a larger pool of contractors to submit their proposals. Given it would be fully funded by the private sector, we take the view that any material development post Government’s assessment will likely be known in 2H24.

• Sarawak making its way. Sarawak will be receiving the first ART prototype in August under the MYR6bn Phase of the 1 Kuching Urban Transport System (KUTS). On a separate note, the construction of the 3.3km Kuching ART route along the Kuching-Samarahan Expressway is expected to be completed in November. Completion progress is at 8.3% as of 1Q23 with a target to commence operations by end 2025. Potential beneficiaries for the Kuching ART project (estimated cost of MYR6bn) include Kimlun (KICB MK, NR) and KKB Engineering. Meanwhile, a faster-than expected rollout of the remaining phases of the Pan Borneo Highway packages and the Sarawak- Sabah Link Road should serve as a further re-rating catalyst.

• Prefer contractors with diversified job portfolios. From the catalysts from the abovementioned projects, we retain Gamuda, Sunway Construction and Kerjaya Prospek as our Top Picks given their steady job replenishment trend and strategic hedge against any downside risks from the domestic construction landscape amid their commendable exposure in overseas jobs (for Gamuda) and also private industrial ones (for Sunway Construction and Kerjaya Prospek). A key downside risk includes longer- than-expected delays in contract rollouts.

Source: RHB Research - 20 Jul 2023