• Top Picks: Kerjaya Prospek and Sunway Construction. The total value of construction work done in 3Q22 amounted to MYR30.5bn (+23.2% YoY, +1.9% QoQ). In the same period, the economic output of the construction sector grew 15.3% YoY (2Q22: +2.4% YoY) due to a low base effect. Nevertheless, we think that labour constraints could be resolved by 1Q23 at the earliest, with contractors awaiting the approval and arrival of foreign workers, putting a lid on hastened progress billings. Still NEUTRAL on sector.

• 3Q22 results were below expectations. Six companies missed, two were in line and two beat expectations. The construction revenues of several companies did pick up in 3Q22 YoY, but the pace was slower than expected amid the shortage in manpower which continued to impact work progress at sites. This, on top of the pressure from elevated building material prices – particularly that of cement. Consequently, during the latest reporting season, we cut FY22-23F earnings by 2.1% and 2.7%.

• Financing growth. We observed that loan approvals for the construction sector dipped for the first time in 15 months, after declining -0.9% YoY and -68.4% QoQ in October. Gross impaired loans (GIL) for the sector grew 57.3% YoY in October (September: +57.8% YoY), indicating that some contractors (mainly the smaller ones) have been unable to withstand the current headwinds from the labour and material price fronts. Cumulatively, GIL grew by 44% YoY in 10M22 (10M21: +19.2% YoY).

• Policy risks continue to linger. Although the 15th general election (GE15) is over – thereby removing the political overhang on the sector, it still remains to be seen as how the unity government will handle the country’s fiscal position. The status of MYR95bn worth of development expenditure proposed before GE15 is pending the re-tabling of Budget 2023. As such, we cannot discount the possibility of a review of infrastructure projects, mainly the Mass Rapid Transit 3 (MRT3), which could see a decrease in contract value, while project owners may postpone investment decisions until there is better policy clarity from the Government.

• Top Picks. We like names from the small- and mid-cap construction space such as Kerjaya Prospek and Sunway Construction. Overall, we believe they can weather the current political climate. Kerjaya Prospek has a framework arrangement with Samsung C&T which could enable it to be exposed to more private-sector sophisticated jobs (backed by its net cash pile). We also favour Sunway Construction for its diverse tenderbook, which consists of internal jobs as well as data centres and factories.

• Upside/downside risks to our sector call are shorter-than- expected/longer-than-expected delays in progress works, success/failure in securing new orders, and cheaper/higher raw material prices.

Source: RHB Research - 7 Dec 2022