• Maintain OVERWEIGHT; Top Picks: Gamuda, Sunway Construction, and Kerjaya Prospek. We reiterate that the construction sector is poised for further orderbook expansions, given the Government’s intent to continue undertaking pump-priming initiatives such as highway projects in Borneo and the Penang Light Rail Transit (LRT). Factors such as ample labour supply, coupled with manageable building material costs, may continue to facilitate the smooth execution of work orders by contractors.

• Job flow trends. According to data from the Construction Industry Development Board (CIDB), the total value of construction projects awarded in 1Q24 stood at MYR30.8bn (1Q23: MYR31.3bn). This value has yet to take into account the contract for the three segments of the Penang LRT’s Mutiara Line, which may be >MYR10.5bn (pending negotiations between SRS Consortium and MRT Corp for Segment 1, while tenders for Segments 2 and 3 have yet to be issued). In East Malaysia, Phase 1B of Pan Borneo Highway Sabah (MYR15.7bn) has seen four out of 20 packages dished out as of 22 Mar, with the remaining 16 packages undergoing the procurement process before finalisation in April – indicating the project is progressing well.

• A major catalyst would be quicker-than-expected rollouts for other mega projects such as Mass Rapid Transit 3 (MRT3), which we believe may see its debut towards late 4Q24 or early 1Q25 – given that MRT Corp plans to finalise the land to be acquired in 3Q24. As for the Kuala Lumpur-Singapore High Speed Rail or HSR project, we expect announcements on the shortlisting of consortiums for the request for proposal stage to be unveiled by end 1H24 – subject to the Government’s approval post evaluation by MyHSR Corp.

• Impact of fuel subsidy rationalisation. Fuel and electricity charges usually make up 1-2% of a contractors’ total costs component – which is negligible. Overall, we believe the impact towards contractors will be more indirect – in the form of transportation of building materials to construction sites, under which vehicles are consuming fuel at the current subsidised rates.

• Valuations. The Bursa Malaysia Construction Index (BMCI) is trading at a 15.5x forward P/E, ie above its 5-year mean of 13.1x. While this mirrors the 15.5x seen during the 2017 construction upcycle – during which most contractors saw upticks in job replenishments – we think the BMCI still has room to ascend further, backed by key catalysts not previously present. These include sizeable data centre jobs on top of the Mutiara Line.

• Our Top Picks are Gamuda, Kerjaya Prospek, and Sunway Construction, given their commendable earnings visibility over the next two years. Gamuda has a sizeable presence overseas too while still maintaining relevance domestically. Meanwhile, Kerjaya Prospek and Sunway Construction have steady pipelines from related-party transactions and their parent firms, as well as ongoing involvements in industrial jobs.

• Key downside risks to our sector call are longer-than-expected delays in contract rollouts and larger-than-expected cost reductions for MRT3.

Source: RHB Securities Research - 18 Apr 2024