• Maintain OVERWEIGHT on sector. After visiting Johor, we are optimistic that projects in the state will continue benefitting contractors over the next few years. We had the opportunity to view the progress of the Johor Bahru Singapore Rapid Transit System Link (RTS) project, and were brought up to speed on the latest state developments by Lee Ting Han, a Johor State Executive Council member for investment, trade and consumer affairs.

• RTS progressing well. Malaysia’s portion of the RTS project was 41% completed as of July, and is set to be completed by end-2026. Sunway Construction (SCGB) is the contractor for the land viaducts. In March, SCGB was awarded with a MYR604.9m contract by Mass Rapid Transit System – which covers Package 1B (advance works for station and viaducts) and Package 5 (terrestrial viaducts and ancillary structures). Meanwhile, marine viaducts are being built by China-based contractors, and these have also seen commendable progress.

• Any more opportunities under RTS? Packages to build the Bukit Chagar RTS station and also the Immigration, Customs and Quarantine Complex (ICQC) are yet to be awarded, after tenders were called in sometime between May and August. SCGB has submitted tenders for Packages 2A and 2B for the ICQC, which we estimate to be worth MYR400m-700m . We view SCGB as the frontrunner for the said packages, as it was already involved in some piling works for the ICQC while Gadang Holdings (GDG MK, NR) secured a job for packages 4 and 6 (Bukit Chagar station and the operation control centre).

• During our meeting with Lee, we gathered that data centres may continue to gain momentum within the next two years. The existing Sedenak Technology Park phase 1 already has hyperscale data centre investors such as Yondr, Keppel Data Centres and Bridge Data Centres. Future entries of data centre investors will be made easier via Tenaga Nasional’s (TNB MK, BUY, TP: MYR12) Green Lane Pathway which offers fast-tracked electricity supply, where data centres will be connected three times faster than the normal delivery time, reducing the implementation period from 36- 48 months to just 12 months. The growth in data centres may benefit contractors with data centre exposure such as SCGB and Gamuda.

• Top Picks are Gamuda, Kerjaya Prospek and SCGB. We prefer these names for their commendable earnings visibility of 3-6 years. Gamuda has a sizeable presence overseas while Kerjaya Prospek’s framework arrangement with Samsung C&T should enable it to be exposed to more private sophisticated jobs (backed by its net cash pile). We also favour SCGB, not just for its stable job flows from its parent but its track record in Johor (MYR1.7bn completed projects) – particularly in the Iskandar region, which could see further growth in the future with the potential Johor Singpore special economic zone being a catalyst.

• Key downside risks to our sector call are delays in contract rollouts and larger-than-expected cost reductions for mega projects.

Source: RHB Securities Research - 25 Sept 2023