Construction - on Your Marks

Date: 
2024-03-29
Firm: 
KENANGA
Stock: 
Price Target: 
2.54
Price Call: 
BUY
Last Price: 
2.50
Upside/Downside: 
+0.04 (1.60%)
Firm: 
KENANGA
Stock: 
Price Target: 
3.16
Price Call: 
BUY
Last Price: 
3.21
Upside/Downside: 
-0.05 (1.56%)
Firm: 
KENANGA
Stock: 
Price Target: 
0.89
Price Call: 
HOLD
Last Price: 
1.43
Upside/Downside: 
-0.54 (37.76%)
Firm: 
KENANGA
Stock: 
Price Target: 
11.50
Price Call: 
HOLD
Last Price: 
13.10
Upside/Downside: 
-1.60 (12.21%)
Firm: 
KENANGA
Stock: 
Price Target: 
1.90
Price Call: 
BUY
Last Price: 
1.83
Upside/Downside: 
+0.07 (3.83%)

We remain OVERWEIGHT on the construction sector ahead of the roll-out of various mega public infrastructure projects such as MRT3, Bayan Lepas LRT, large-scale flood mitigation projects as well as new Pan Borneo Highway packages. Meanwhile, the private-sector construction market will stay vibrant underpinned by massive investment in new semiconductor foundries and data centres. Not surprisingly, builders are guiding for higher new job wins this year. Our top sector picks are GAMUDA (OP; TP: RM6.20), IJM (OP; TP: RM2.54) and SUNCON (OP; TP: RM3.16).

We maintain our OVERWEIGHT rating on the construction sector ahead of the roll-out of various mega public infrastructure projects such as the RM45b MRT3 or MRT Circle Line which will provide connectivity to the existing MRT, LRT, monorail and train lines in Klang Valley through interchange stations, and the RM9.5b Bayan Lepas LRT, which will help to ease the chronic traffic congestion in Penang Island. Coupled with the roll-out of six flood mitigation projects reportedly to be worth RM13b including flood mitigation works at Sungai Johor (Johor), the construction of the Sungai Klang-Sungai Rasau dual-function reservoir (Selangor) and the Sungai Golok Integrated River Basin Development Phase 3 (Kelantan) and new Pan Borneo Highway packages, we believe there will be enough jobs to go around for all players. We are unperturbed by a lower gross development expenditure of RM90b in Budget 2024, vs. RM97b estimated in Budget 2023 as the government can tap into DanaInfra Nasional Bhd to fund these large-scale public projects on an off-balance sheet basis.

In terms of timing, Bayan Lepas LRT could be rolled out as soon as the middle of the year as we understand “chariot driver” GAMUDA is already in “advanced” discussions with the government to finalise the implementation model, pending government’s approval while the Department of Environment published the Environmental Impact Assessment (EIA) report for a segment of the LRT on 5 Mar 2024. This federal-funded project comprises land acquisition cost of about RM1.5b and construction cost of RM7bRM8b. Meanwhile, we understand that MRT Corp recently asked bidders for MRT3 work packages to extend the validity of their tenders for a fourth time to end-Mar 2024 and it appears that MRT Corp is likely to ask for another extension soon. We believe realistically, the project may only get off the ground in 2HCY24 the soonest.

For the KL-Singapore high-speed rail (HSR), so far only BLAND (Not Rated) announced that its 70%-owned unit Berjaya Rail had formed a consortium with IJM, MRCB (Not Rated) and national railway firm KTMB to submit a bid for the HSR when the request for information (RFI) exercise closed on 15 Jan 2024. It was reported that a total of seven consortia submitted their bids for the HSR project. In our opinion, it is still early days for the project.

On the other hand, the government has committed to expedite on-going projects in East Malaysia such as Pan Borneo Highway and Sabah-Sarawak Link Road. According to the Mid-term Review of the 12MP, Pan Borneo Highway Sarawak Phase 1 was 92% completed while the Phase 1A in Sabah was 74% completed in 2023. Given its involvement in the Sarawak-Sabah Link Road project, KIMLUN (MP; TP: RM0.89) is keen to bid for work packages from Pan Borneo Highway Sarawak Phase 2, while IJM has also shown interest. Meanwhile, the Sabah state government said that the entire 19 work packages of Phase 1B of the Pan Borneo Highway Sabah worth a total of RM15.7b will be awarded by Mar 2024.

Meanwhile, the private-sector construction market will stay vibrant, underpinned by massive investment in new semiconductor foundries and data centres. Malaysia is gaining traction in terms of destination for data centre investment, as evidenced by TENAGA (MP; TP: RM11.50) having signed Electricity Supply Agreements with nine data centres requiring a potential energy demand of 2,300MW. So far, nine data centres have been completed with a total energy demand of 635MW. The national utility company guided for potential additional demand for 7,000MW of electricity from data centres by CY34. These semiconductor foundry and data centre projects are sizeable, ranging between RM1b to RM1.5b each, and are typically on a fast-track basis, which means they fetch better margins. SUNCON and KERJAYA (OP; TP: RM1.90) have already bagged such contracts.

Positive forward guidance. Generally, builders have guided for higher new job wins this year. GAMUDA guided for RM25b new job wins within 24 months, while SUNCON recently raised its guidance for new job wins in FY24 to RM3b from RM2.5b. While WCT has not secured any new key jobs in FY23, it also guided for bullish new job wins of RM3b (vs. our more prudent assumption of RM1b). Meanwhile, IJM’s YTD FY24 (FYE: Mar 2024) new job wins of RM3.62b have already surpassed its full-year target of RM3.0b and we assume it will secure RM4.6b contracts in FY25 (FYE: Mar 2025). On the other hand, YTD, KERJAYA has secured RM377.9m worth of new jobs against our full-year assumption of RM1.5b. KIMLUN’s YTD new jobs have hit RM133.6m against our full-year assumption of RM750m.

Meanwhile, the industry is poised for margin recovery as newly-secured contracts reflected cost inflation. In addition, post the pandemic, it has become increasingly common for contracts to carry price escalation clauses to safeguard the margins of contactors. As such, we expect industry margins to improve in CY24 as older contracts with low margins tail off and new contracts with normalised and higher margins start to contribute.

Our sector top picks are:

1. GAMUDA for: (i) being the front-runner for the tunnelling job for MRT3 and Bayan Lepas LRT, (ii) its ability to secure new jobs in overseas markets, (iii) its strong war chest after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a record outstanding order book of RM26.1b, and (v) its inroads into the renewable energy space.

2. IJM for: (i) it is poised to garner a slice of action in the imminent mega rail projects, i.e. MTR3 and Bayan Lepas LRT given its involvement in the previous MRT and LRT projects, (ii) its strong earnings visibility underpinned by an outstanding construction orderbook of RM6.6b and new property sales of RM1.4b, and (iii) Kuantan Port’s position as the largest port in the East Coast capturing export and import activities growth.

3. SUNCON for: (i) its extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works, (ii) its strong earnings visibility underpinned by a record outstanding order book of RM6.05b, (iii) its strong balance sheet that enables it to carry out projects for local and overseas clients based on a deferred payment model, and (iv) recurring jobs from parent and sister companies.

Source: Kenanga Research - 29 Mar 2024

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