• Maintain OVERWEIGHT; Top Picks: Gamuda, Sunway Construction (SCGB) and Kerjaya Prospek. With the total value of projects awarded in 2024 at MYR199bn (the highest in eight years), we expect job flow trends to remain robust this year. This is mainly premised on the Works Ministry's projection of construction spending to be worth MYR200bn in 2025 - with MYR88bn from the Government's budget, MYR32bn estimated to be from projects by government-linked companies, and the remaining MYR80bn anticipated to come from the private sector.
• We envisage government contract rollouts to strengthen in CY25, underpinned by impending project awards ie Penang Light Rail Transit (LRT) (estimated at MYR8-12bn), reinstatement of the five LRT 3 stations (estimated at MYR1.5-2bn) and Sarawak's Northern Coastal Highway (MYR6bn), among others. Water-related infrastructure is another key theme for CY25 as the Department of Irrigation and Drainage has approved 43 high-priority flood mitigation projects worth MYR10.5bn upon reviewing the latest developments. In the same vein, a budget of MYR2.5bn has been approved by the Cabinet for the National Non-Revenue Water programme to begin from 2025 to 2030.
• Industrial prospects. Gamuda's latest move to acquire 389 acres of land to develop cloud/data centre (DC) infrastructure (may be close to 1GW in capacity, in our view) in Negeri Sembilan indicates that the growth of Malaysia's DC space is not just limited to Selangor and Johor. According to Knight Frank, Malaysia's future supply of DCs (under construction and committed) is 1.3GW of estimated IT capacity. Assuming 50% of the 1.3GW of future supply is committed, potential job values for contractors could be MYR19.5bn (based on the estimated average cost of MYR30m per MW). In the grand scheme of things, the industrial building sub-sector - including DCs, warehouses and manufacturing facilities - has witnessed a gradual decline in overhang from CY17 to 1H24, while the industrial properties-under-construction total has been rising since CY22 (Figures 4 and 5).
• Valuations. The Bursa Malaysia Construction Index is trading at a forward P/E of 18.2x. While it is above the 15-16x P/Es observed during the 2017 construction upcycle - we believe that the sector is not ripe for substantial profit-taking, in light of steadier news flow ie the Johor-Singapore Special Economic Zone and public-private partnership projects like the West Ipoh Span Expressway and the Juru-Sungai Dua Elevated Highway in Penang on top of the aforementioned points. Potential catalysts for the sector include much stronger FDI inflows in CY25 (that may drive industrial building demand) and the implementation of the Johor Bahru LRT or the Autonomous Rapid Transit system which has yet to see any new updates.
• Top Picks include Gamuda, Kerjaya Prospek and SCGB amid steady contract flows combined with commendable earnings visibility over the next two years. Key downside risks to our sector call are an unexpected slowdown in job rollouts or cancellations, and sudden labour shortages.

Source: RHB Research - 6 Jan 2025