• Maintain OVERWEIGHT; Top Picks: Gamuda, Sunway Construction and Kerjaya Prospek. The total value of projects awarded to contractors in 2023 stood at MYR127.4bn, 22% YoY lower than the MYR163.2bn seen in 2022 according to the Construction Industry Development Board (CIDB). Nonetheless, we view this as a temporary blip – contract rollouts are expected to be backed by the Government’s MYR90bn development expenditure (DE) allocated for 2024, with 21% of DE focusing on the transport subsector vs 18% in 2023.

• Government projects saw a 33% YoY drop in value awarded during 2023, reaching MYR29bn (2022: MYR43.9bn). Among the type of projects – infrastructure recorded the largest annual drop in terms of project value, at -47% YoY (amid the dearth of big scale public jobs in 2023), followed by residential at a 37% YoY drop. However, non-residential projects bucked the trend, rising 4% YoY to reach MYR76.8bn.

• Key events in 2024. In 1H24, awards may pertain to flood mitigation projects, the Penang Light Rail Transit (LRT), Pan Borneo Highway Sabah Phase 1B and the reinstatement of the five LRT3 stations. As for the Mass Rapid Transit 3 (MRT3), we take comfort that the Government is going ahead with the land acquisition process for the project. According to MRT Corp, the notification of identified land is expected to start in 2Q24 with the finalisation of land to be acquired taking place in 3Q24 (Figure 7). Therefore, we assume that MRT3 awards could take place from 4Q24.

• Upcoming catalysts for the sector include a higher participation of Malaysia-based contractors in Indonesia’s new capital project. So far, IJM Corp is eyeing the Nusantara state civil servant housing project (worth c.MYR1bn), while there have been other several Malaysian companies which submitted letters of intent in 2022 which are being evaluated by the Nusantara Capital Authority. Another catalyst is a quicker-than-expected rollout for the proposed three lines of the Johor Bahru Light Rail Transit. The Johor Government was reported to be set in submitting the project’s proposal to the Federal Government in late Nov 2023.

• Valuations. The Bursa Malaysia Construction Index is trading at a 13x P/E, slightly above its 10-year mean of 12.7x. Notwithstanding this, the index was trading at 15.5x in mid-2017 during the construction upcycle. With commendable catalysts in store for the sector, we view the current valuation of the index to be undemanding and as such, an attractive level to enter.

• Environmentally, there has been a slew of contractors (such as Sunway Construction, HSS Engineers (HSS MK. NR) participating in renewable energy-related initiatives such as the Corporate Green Power Programme. Separately, construction giants such as Gamuda recently announced its participation to jointly develop the 187.5MW Upper Padas Hydroelectric Dam with Sabah Energy Corporation and Kerjaya Kagum Hitech JV.

• Key downside risks to our call include longer-than-expected delays in job rollouts and larger-than-expected cost cuts for MRT3.

Source: RHB Securities Research - 3 Jan 2024