We expect contract awards continue to slowdown going forward due to reduction in development expenditure as the government reprioritises major infrastructure projects. Industry players are shifting their focus on potential jobs from Sarawak as the state government has allocated c.RM9bn for development expenditure under the state budget 2019 which is the biggest in its history. Maintain NEUTRAL on construction post GE14 and scrapping of mega rail projects. The domestic construction industry landscape is expe cted to remain challenging and we do not expect a significant improvement in the near term. Nonetheless, high orderbook levels (average cover ratio of 4.5x) and rock bottom valuation (0.7x P/B) should cushion further downside amid subdued near term industry prospects. Our top picks are Suncon (BUY, TP: RM1.86) and Taliworks (BUY, TP: RM1.01).

Lower development expenditure. Development expenditure for 2019 is forecast to decline slightly to RM54.7bn from RM54.9bn in 2018 (-0.4% YoY) as the Government reprioritises major infrastructure projects. This reinforces our view of a continued slowdown in contract awards going forward. As it is, 12M18 domestic contract awards to listed contractors are down -37% YoY.

Sarawak the next place to be. Job flows in Peninsular Malaysia slowed down significantly post GE14. We understand that industry players are aiming for jobs in Sarawak as the state government has allocated c.RM9bn for development expenditure under the state budget 2019 which is the biggest in its history. Work packages with total contract value of c.RM10bn from Sarawak Coastal Road Project and Trunk Road project are expected to be rolled out from next year onwards. Moreover, a total of 247 water related projects including water treatment plant, water piping upgrading works and wastewater management worth RM2.8bn is expected to be implemented over the next two years. Funding for those projects is expected to come from Sarawak state reserves (c.RM31bn) which insulates the projects from risk of reduction of federal government spending.

Mainly smallish jobs this year. We expect smallish basic infrastructure projects such as road upgrading, hospital, water, sewerage and rural area development projects will be rolled out by government this year which we believe is insufficient to spark any enthusiasm back towards the sector. However we do not discount potential events such as award of Phase 2 of Klang Valley Double Track project (RM5bn) and news flow on ECRL (possible revival) and Pan Borneo Sabah could alleviate pessimistic sentiment towards the sector.

Forecast. Unchanged.

Maintain NEUTRAL. Maintain NEUTRAL on construction post changes in federal government and scrapping of mega rail projects. The domestic construction industry landscape is expected to remain challenging and we do not expect a significant improvement in the near term. The 39% decline in contract awards thus far into 2018 supports our view. Nonetheless, high orderbook levels (average cover ratio of 4.5x) following the robust job flows in the past 2 years coupled with rock bottom valuation (0.7x P/B) should cushion further downside amid subdued prospects.

Top Picks. We continue to like Sunway Construction (BUY, TP: RM1.86) due to (i) healthy balance sheet; (ii) pure construction play and (iii) strong support from parent co which enable it to ride through current down cycle. Taliworks (BUY, TP: RM1.01)

is our other top pick given its potential lucrative dividend (c.9% yield based on current share price) and defensive nature under current turbulent market environment.

Source: Hong Leong Investment Bank Research - 17 Jan 2019