Review

Contractors’ 1Q24 results were broadly in-line as 4 out of 8 contractors under our coverage reported results that met expectations. GAMUDA, SUNCON, KERJAYA, and INTA reported earnings within our expectations.

IJM's results surpassed our expectations, primarily due to higher-than-expected contributions from its non-core business sectors, particularly the industry and infrastructure divisions. Similarly, WCT reported robust earnings that exceeded projections, driven by better-than-anticipated performance in its property development and property investment divisions. However, TRC and GADANG’s results were disappointing, underpinned by: (i) lower-than-expected revenue recognition from existing construction projects, and (ii) higher-than-anticipated raw material costs.

In general, most of the construction companies in our coverage believe that raw material costs are stabilising. Meanwhile, we noticed that the certain construction companies’ earnings visibility is strengthening as more new data centre projects are secured.

Outlook

Following the announcement of the Penang LRT project in late March 2024, we expect the construction sector to remain robust throughout the year. This positive outlook is supported by the potential launch of additional railway-related projects and flood mitigation initiatives. While there is considerable interest in the KL-SG highspeed rail (HSR) project, further updates are anticipated in Budget 2025, or by the end of 2HCY24, pending more clarity on the project’s funding structure.

We anticipate that the award of the MRT3 project will be announced soon, likely by the end of 3QCY24, as the deadline for tender submissions was closed in March 2024. The MRT3 project, due to its substantial scale, is expected to have a significant impact on the construction industry.

Additionally, the government's commitment to mitigating floods remains strong, as evidenced by the RM11.8bn allocated for 33 high-priority projects in Budget 2024.

Recommendation

We maintain our OVERWEIGHT call on the Construction sector. Top Picks under our sector coverage are SUNCON and INTA. We continue to like SUNCON (TP: RM3.79), due to the following factors:- (i) strong position as a contender for mega infrastructure projects, namely MRT3, Johor ART and Penang LRT, (ii) strong earnings visibility on the back of a robust outstanding order book, (iii) potential new earnings driver from a power plant project in Vietnam, and (iv) its leading position in securing more jobs in the thriving ATP industry. Also, we like INTA (TP: RM0.71), as the group is the direct beneficiary of the revitalisation of the property sector with strong earnings visibility backed by a resilient orderbook of RM1.8bn.

Source: TA Research - 5 Jun 2024