• Stay OVERWEIGHT; Top Picks: Gamuda, Sunway Construction, and Kerjaya Prospek. Out of the 10 companies under our coverage that reported results, three were in line, two exceeded expectations, and five fell below estimates. All in, we believe contractors should continue booking in better progress billings, evident from the total value of work done of MYR38.9bn (+20% YoY) – the highest on record.

• Contract rollouts (private and government) have generally been active so far, with MYR127bn worth of construction projects awarded in 8M24, ie 41% YoY higher than the MYR90bn recorded in 8M23. On further scrutiny, the value of government projects awarded in 8M24 (MYR33.5bn) almost matches the MYR36bn posted for the 2023 full year – indicating that public sector awards are picking up pace.

• Putting the data centre (DC) prospects and Penang Light Rail Transit (LRT) aside, a key update to look out for is the decision on whether an LRT (estimated at MYR17bn) or an Elevated Autonomous Rapid Transit or EART (estimated at MYR7bn) will be implemented in Johor. This ties in well with the highly anticipated Johor-Singapore Special Economic Zone (we expect a 4Q24 signing). MRT Corp’s public inspection exercise has also just started from 2 Sep until 2 Dec to gather public feedback on the alignment – indicating the project is still making its way. Additionally, major highways that could see further developments are the West Ipoh Span Expressway (c.MYR5.8bn) and Sungai Klang Link expressway (c.MYR9bn).

• With most major contractors moving up the value chain to undertake more sophisticated jobs, eg DCs and industrial facilities instead of property building projects, this may provide ample opportunities for medium-sized contractors – eg Vestland (VLB MK, NR) and Inta Bina (INTA MK, NR) – to scout for. Moreover, areas such as Kuala Lumpur are getting increasingly dense (at 8,518 persons per sq km in 2023 vs 7,092 persons per sq km in 2013), which may warrant the need for more residential dwellings.

• Valuations. The Bursa Malaysia Construction Index (BMCI) is trading at a forward P/E of 16.3x, which is near the 15-16x level seen during the 2017 construction upcycle. While the BMCI is up c.40% YTD, we believe the sector is not yet ripe for profit-taking as we envisage steadier news flows in 4Q24 and 1H25 – eg the feedback evaluation of the Mass Rapid Transit 3 (MRT3) alignment post public inspection and the Government’s decision on the viability of the Kuala Lumpur-Singapore High Speed Rail. Larger-cap contractors are also shifting towards jobs of higher value (DCs and industrials) as mentioned above – warranting a higher valuation vs 2017.

• Top Picks are Gamuda, Kerjaya Prospek and Sunway Construction amid steady contract flows and commendable earnings visibility over the next two years. Key downside risks to our OVERWEIGHT sector call: i) Unexpected slowdowns in job rollouts, ii) sudden labour shortages, and iii) Malaysia’s risk of being flagged as a launchpad for China’s access to high-end chips banned by the US, which could impede DC prospects.

Source: RHB Securities Research - 12 Sept 2024