Highlights

• Higher showing YoY but... In 2Q16, domestic contract awards to listed contractors amounted to RM8bn (+73% YoY, -73% QoQ). The strong YoY jump was a result of several MRT2 viaduct and related contracts awarded totalling RM4.9bn.

• ...lower QoQ due to high base. The steep -73% QoQ decline in domestic job flows was due to the high base witnessed in 1Q16 as a result of the MRT2 underground works (RM15.5bn) awarded to the MMC-Gamuda JV. Stripping this out, the QoQ decline would be less drastic at -44%. Apart from the MRT2 underground works, the high base in 1Q16 was also due to the Pan Borneo Highway (RM3.2bn) and Setia-Pantai Expressway (RM3.7bn).

• Halfway through a record year. 1H16 domestic contract awards totalled RM37.7bn, increasing by more than 3-folds YoY. Despite only being at mid-year, this amount has already surpassed all prior full year figures, making it a record year. Even i f we were to remove the impact of the MRT2 underground contract, 1H16 numbers would still register a robust +153% YoY growth.

• More to come in 2H. We expect the following contracts to be rolled out in 2H16: (i) 6 viaduct packages for the MRT2 (RM7-8bn), (ii) 8 packages of the Pan Borneo Sarawak (RM10-12bn), (iii) urban highways such as the DASH (RM4bn) and SUKE (RM4bn) and (iv) LRT3 (RM9bn). There should also be a good flow of building jobs up for grabs driven by catalytic developments within the Klang Valley such as Tun Razak Exchange, Kwasa D’sara, Bukit Bintang City Centre, Cyberjaya City Centre and Bandar Malaysia.

• Overseas not in focus. Foreign contract awards for 2Q16 stood at RM788m (+53% YoY, +167% QoQ). The figure for 1H16 totalled RM1.1bn, declining -57% YoY as most contractors continue to focus locally given the abundance of jobs up for grabs.

Risks

• A space to watch out for is the softening domestic property market, leading to slower private sector contracts.

Rating

• Maintain OVERWEIGHT

• Our investment thesis is simple: Stay OVERWEIGHT on construction as 2016 is already a record year for contract flows.

Top Picks

• For the large cap contractors, we highlight Gamuda (BUY, TP: RM5.65) as our top pick given its expected earnings resurgence from the rollout of the MRT2. We also like WCT (BUY, TP: RM2.12) as we believe it is set to witness a reversal of fortunes. The impending listing of its construction arm and REIT are tell-tale signs that a positive earnings momentum is forthcoming.

• For the small caps, we like Mitrajaya (BUY; TP: RM1.88) which should see a revival of job wins this year, coupled with an 11% 3-year earnings CAGR at undemanding valuations.

Source: Hong Leong Investment Bank Research - 5 Jul 2016