The contractors’ share prices have experienced substantial positive momentum YTD, with prominent names such as GAMUDA, IJM, and SUNCON among others, driving the trend. This bullish sentiment is largely driven by a revitalised property sector and the potential rollout of large-scale infrastructure projects. Furthermore, the share price rally has also been fuelled by the expanding data centre construction market, which offers higher project value opportunities with shorter construction durations.

First Train Has Started to Move, MRT3 Could be the Next

In mid-1HCY24, the federal government announced its decision to take over the Penang LRT project from the Penang state government, allocating a budget of RM10bn as outlined in Budget 2024. MRT Corp, in collaboration with the Gamudaled SRS consortium, is expected to finalise the project details and actual costs by the end of 2024. We anticipate that the Penang LRT project could be valued at least RM20bn, based on an average cost of RM350mn/km, including land acquisition, construction, and engineering costs.

Looking ahead, we expect the MRT3 to become a key driver for infrastructure construction companies. We expect the tender results for MRT3 to be announced soon, following the expiration of the tender validity at the end of March 2024. Given its superior feasibility in comparison to the KL-SG High Speed Rail (HSR) project, it is possible that the MRT3 project, which is estimated to cost RM31bn, will be awarded in 2HCY24.

Robust Data Centre Construction

Following commitments from major multinational technology companies, including Google and Microsoft, to establish new data centres in Malaysia with a gross investment value exceeding RM14bn over the next five years, we expect construction companies to be direct beneficiaries of this influx. The government's incentives are likely to continue attracting foreign investors to establish more data centres, resulting in countless job opportunities and a positive economic impact on Malaysia.

This development will significantly elevate the construction landscape, as building data centres involves a higher degree of complexity compared to other industrial construction projects. Consequently, we anticipate an increase in data centre project awards over the next six months, benefiting domestic construction players such as GAMUDA, SUNCON and IJM.

Potential Catalyst From the Semiconductor Industry

Aligned with the National Semiconductor Strategy (NSS), the Malaysian government plans to allocate RM25bn in fiscal support through targeted incentives to boost the local advanced technology industry. The NSS aims to attract domestic direct investment in integrated circuit design, advanced packaging, and manufacturing equipment, while focusing foreign direct investment on wafer fabrication and manufacturing equipment. This initiative is expected to significantly increase demand for high-complexity industrial property construction. Consequently, construction companies capable of securing advanced technology projects, such as GAMUDA, SUNCON, and IJM, are likely to benefit substantially.

Drums Beat for the KL-SG High Speed Rail

There have been no further updates on the HSR project since the request-forinformation exercise deadline in January this year. Despite receiving concept proposals from seven local and international consortiums, Transport Minister Anthony Loke stated that the project requires cabinet approval before proceeding to discussions with Singapore's authorities. The cabinet’s approval is estimated to take at least 4-6 months, during which time efforts will be made to continue identifying a viable financing solution for the HSR project. As such, we anticipate that an announcement regarding the status of the HSR rollout will be issued in 2HCY24.

Fast Growing Outstanding Order Book

The property sector's revitalisation has propelled a surge in activity in the construction sector, as developers have ramped up new launches following a period of slowdown during the COVID-19 pandemic. As a result, most construction companies under our coverage have seen a significant increase in their order books, which should provide strong earnings visibility for the next 2 to 3 years.

Recommendation

We maintain our Overweight call on the Construction sector, with GAMUDA, SUNCON and INTA as our top picks. GAMUDA and SUNCON are particularly favoured due to their robust order books of RM26.3bn and RM7.9bn, respectively. Both companies are strong contenders for the MRT3 and Penang LRT projects, supported by their proven track records in mega-scale railway projects. Additionally, GAMUDA and SUNCON are well-positioned to capitalise on the growing data centre projects, given their expertise in industrial construction and mechanical, electrical, and plumbing fields. Subsequently, we continue to like INTA for the following factors: (i) a direct beneficiary of the robust domestic property sector, (ii) strong earnings visibility backed by a resilient order book, and (iii) improving profitability.

Source: TA Research - 2 Jul 2024