KUALA LUMPUR (July 12): Hong Leong Investment Bank (HLIB) retained its 'overweight' call on the construction sector for the second half of the year (2H2024), anticipating the roll-out of big-ticket infrastructure contracts.

This should accelerate contract awards in 2H2024, potentially reaching over RM40 billion as per HLIB’s data compilation. 

The house's top picks remain unchanged, namely Gamuda Bhd (KL:GAMUDA) with a 'buy' call and a target price (TP) of RM9.08 a share, and Sunway Construction Group Bhd (KL:SUNCON), with a 'buy' rating and a TP of RM5.60.

In a note on Friday, HLIB noted that Bursa Malaysia's Construction Index surged by 42.6% in 1H2024, outperforming the FBM KLCI benchmark by 33.3%. 

The sector's growth was driven by a 40.8% increase in contracts awarded, heavily influenced by data centres (DCs) and Johor reinvigoration themes, with SunCon rallying by 131% year-to-date. 

"We see further upside to the sector, as both themes still have room to play out," the research house added.

Contractor business models have a higher beta to the DC upcycle, due to factors like asset-light operations and quicker earnings impact. In 1H2024, domestic contract flows were impressive at RM20.7 billion, up 40.8% year-on-year, with private-sector projects making up 87% of total value. 

The second quarter of the year (2Q2024) alone saw RM13.8 billion worth of contracts, the second-highest quarterly flow since 1Q2009.

Malaysia's rise as the preferred DC destination has yielded a sizeable DC pipeline of 2.8GW in the pre-construction phase, bolstered by Johor's emergence as the fastest-growing DC market in Southeast Asia.

Noteworthy investments include Chindata Group (RM15 billion), Microsoft (RM10.5 billion), Google (RM9.4 billion), EdgeConneX (RM9.3 billion), and Amazon Web Services (RM25.5 billion). Contractors like SunCon and Gamuda are well positioned to capitalise on this pipeline.

"We anticipate the roll-out of significant public infrastructure projects in 2H2024," HLIB said.

The projects include the Penang Light Rail Transit (RM10 billion), Pan-Borneo Highway Sabah Phase 1B (RM14 billion), and Phase 2 of the Sarawak-Sabah Link Road (RM7.4 billion). Additional projects include the Northern Coastal Highway in Sarawak, Sabah hydro and water projects, Penang airport expansion, and critical flood mitigation projects. 

HLIB said positive sentiment could also arise from the finalisation of the Johor Bahru-Singapore Special Economic Zone project and Budget 2025. Potential developments in projects like the Kuala Lumpur-Singapore High-Speed Rail and Johor Automated Rapid Transit could further bolster the sector. 

It noted that the upcoming Johor Bahru-Singapore Rapid Transit System is projected to have a daily ridership of 40,000 upon completion in 2026, underscoring the need for high-capacity connectivity infrastructure.

The sector faces manageable cost pressures, following the government’s removal of blanket diesel subsidies. 

The direct impact on fuel at sites is limited, as industrial diesel is procured at floating prices, but building material logistics costs have increased. Nonetheless, higher-quality contractors have built buffers to absorb these costs.

At the time of writing on Friday, Gamuda traded six sen or 0.8% lower at RM7.82 a share, valuing the group at RM21.7 billion, while SunCon was eight sen or 1.7% lower at RM4.51, translating into a market capitalisation of RM5.83 billion for the group.

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