KUALA LUMPUR: RHB Investment Bank Bhd (RHB Research) believes that trading momentum among construction counters will remain strong in the coming quarters, with infrastructure, industrial, or data centre wins newsflow providing more upside potential. 

The firm said this is backed by developments in the land acquisition process for Mass Rapid Transit 3 (MRT3), concept proposals for the Kuala Lumpur-Singapore high speed rail (HSR) project, and the completion of the study on Johor's proposal for an elevated Autonomous Rapid Transit (ART) system by August.

The Bursa Malaysia Construction Index (BMCI) is trading at a forward price-to-earnings (P/E) of 19 times to 20 times, above the 16 times seen during the 2017 construction upcycle. 

RHB Research believes that there is still room for upside for the BMCI, given on the prevalence of industrial jobs (including data centres) which were absent during the 2017 upcycle. 

"Certain mid-cap to large-cap contractors, such as Gamuda Bhd and Kerjaya Prospek Group Bhd, are trading at less than 20 times earnings.

"Therefore, anticipated news flow on infrastructure, industrial, or data centre wins could push the BMCI index higher than the current forward P/E of 19 times to 20 times," it added.

The firm said contract rollouts in the construction sector have been steady, with RM89 billion worth of projects awarded to contractors in the first half of 2024 (1H24), which was more than half of the value seen in 2023 (RM146.5 billion). 

"Private and government contract awards worth RM67 billion and RM22 billion in 1H24 were also more than half of that recorded throughout 2023."

"We think the diesel subsidy rationalisation will give the government more fiscal headroom to roll out projects," it said in a note.

Additionally, RHB Research also highlighted that the Phase 1B of Pan Borneo Highway Sabah (RM15.7 billion) has seen four out of 19 packages awarded, with the remaining ones in the final evaluation stages of the open pre-qualification tender before likely being issued in the third quarter of 2024 (3Q24). 

Likewise, it said the Sarawak Sabah Link Road Phase 2 (RM7 billion) saw the Maltimur Aktif Unggul JV appointed as the main contractor in March, with subcontractor packages to be awarded next. On the industrials sector, the firm said non-residential properties (which include industrial buildings) have seen commendable growth with RM77 billion worth of projects awarded year-to-date (YTD) versus RM81.7 billion in 2023.  "This is a testament to the rising foreign direct investment (FDI) in Malaysia - the country approved RM83.7 billion, an increase of 13 per cent year-on-year (YoY) in investments for 1Q24 with foreign investments making up approximately 57 per cent." 

"Upcoming areas such as the Malaysia Semiconductor Accelerator and Integrated Circuit Design Park (in Puchong) and the Kerian Integrated Green Industrial Park (in Perak) could drive further industrial interest," it added.

Overall, RHB Research has kept an "Overweight" call on the construction sector, with top picks being Gamuda, Kerjaya Prospek, and Sunway Construction Group Bhd (SunCon) for their commendable earnings visibility over the next two years.

The firm said that Gamuda has a sizable presence overseas while maintaining its relevance domestically. 

In contrast, Kerjaya Prospek and SunCon not only have steady pipelines from related-party transactions but also ongoing industrial jobs.

https://www.nst.com.my/business/corporate/2024/07/1083225/construction-stocks-likely-see-more-upside-newsflow-contract-wins