We remain OVERWEIGHT on the construction sector. After the lull in CY23, we expect a fresh wave of public infrastructure projects to finally hit the market in CY24. While the gross development expenditure of RM90b in Budget 2024 is lower than RM97b in Budget 2023, the government can tap into DanaInfra Nasional Bhd to fund large-scale public projects on an offbalance sheet basis. Meanwhile, the private sector construction market will stay vibrant, underpinned by massive investment in new semiconductor foundries and data centres. Our top sector picks are GAMUDA (OP; TP: RM5.45), IJM (OP; TP: RM2.31), and SUNCON (OP; TP: RM2.26).

We remain OVERWEIGHT on the construction sector. After the lull in CY23, we expect a fresh wave of public infrastructure projects to finally hit the market in CY24. While the gross development expenditure of RM90b in Budget 2024 is lower than RM97b in Budget 2023, the government can tap into DanaInfra Nasional Bhd to fund large-scale public projects on an offbalance sheet basis.

High on the priority list are the RM45b MRT3 or MRT Circle Line which will provide connectivity to the existing MRT, LRT, monorail and train lines 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), we believe there will be enough jobs to go around for all players.

In terms of timing, Bayan Lepas LRT could be rolled out in the next 3-4 months, as the lead contractor GAMUDA is already in “advanced” discussions with the government to finalise the implementation model. This federal-funded project comprises land acquisition cost of about RM1.5b and construction cost of RM7b-RM8b. However, the same cannot be said for MRT3 of which status is still unclear while the validity of tenders for its work packages has been extended for a fourth time to end-Mar 2024 from end-Dec 2023. We believe, realistically speaking, MRT3 is more likely to get off the ground in 2HCY24.

The government has committed to expedite the on-going projects in East Malaysia such as Pan Borneo Highway and SabahSarawak Link Road. According to the Mid-term Review of the 12MP, Pan Borneo Highway Sarawak Phase 1 is 92% completed while the Phase 1A in Sabah is 74% completed. Given its involvement in the Sarawak-Sabah Link Road project, KIMLUN (MP; TP: RM0.83) 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 High 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 (OP; TP: RM11.45) having signed Electricity Supply Agreements with eight data centres boasting a total capacity of 2,000MW, out of which six (292MW) are already up-and-running. The national utility company guided for a potential additional demand for 7,000MW of electricity from data centres by 2034. 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 better margins. SUNCON and KERJAYA (OP; TP: RM1.67) have already bagged such contracts.

The industry is poised for margin recovery as newly-secured contracts have 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 more normalised margins start to contribute.

Source: Kenanga Research - 5 Jan 2024