• Maintain OVERWEIGHT. Top Picks include Gamuda, Sunway Construction and Kerjaya Prospek. Out of the 10 companies under our coverage that reported results, two were in line, two exceeded expectations and five fell below estimates. Nevertheless, most players charted earnings growth – and we note that our earlier estimates were too optimistic. All in, we view that contractors should continue booking better progress billings, as evidenced by the total value of work done – at MYR36.8bn (+14% YoY), ie the highest in 17 quarters.

• Contract rollouts (private and government jobs) have generally been active so far, with MYR69.9bn worth of construction projects awarded in 5M24, 37% YoY higher than the MYR50.9bn recorded in 5M23. Moreover, Deputy Works Minister, Datuk Seri Ahmad Maslan estimated that 40% of the MYR90bn development expenditure allocated under Budget 2024 will be given out in the mid-year.

• We take comfort from the slew of private sector projects which may continue to grow (particularly in the industrial space, eg data centres and factories). According to the National Property Information Centre (NAPIC), the value of transactions for industrial properties grew by 28% YoY in 1Q24. In fact, the value of projects awarded for the non-residential property segment (which includes industrial properties) hit MYR52.2bn in 5M24 – which was more than half of the MYR81bn recorded in 2023.

• A major catalyst would be a quicker-than-expected rollout of other mega projects such as Mass Rapid Transit 3 (MRT3), which may see its debut towards late in 1H25 as MRT Corp is expected to finalise the land to be acquired in late 1H24, in our view. As for the Kuala Lumpur-Singapore High Speed Rail (HSR), we expect announcements on the shortlisting of consortiums for the request for proposal stage to be by end-3Q24, subject to the Government’s approval post evaluation by MyHSR Corp.

• Valuations. The Bursa Malaysia Construction Index (BMCI) is trading at a forward P/E of 17x, vs 15-16x recorded during the 2017 construction upcycle (when most large-cap contractors benefit from an uptick in job wins). We view that there is still room for upside for the BMCI, premised on the prevalence of data centre and industrial jobs that were absent during the 2017 upcycle.

• Top Picks include Gamuda, Sunway Construction and Kerjaya Prospek, on their commendable earnings visibility over the next two years. Gamuda has a sizeable presence overseas while still remaining relevant domestically. Kerjaya Prospek and Sunway Construction do not only have steady work pipelines from related party transactions, but also ongoing industrial jobs.

• Key downside risks to our sector call are an unexpected slowdown in the rollout of construction jobs, and sudden labour shortages.

Source: RHB Securities Research - 14 Jun 2024