The uptrend in the construction sector is expected to persist through 2025, driven by a robust pipeline of infrastructure and data centre projects. Several delayed public infrastructure projects are anticipated to commence soon, while data centre projects remain strong in the near term, with 7,200MW of data centre opportunities projected by 2035. This growth is supported by major tech giants and data centre operators making Malaysia as a key hub for their operations. Construction companies have set bullish job replenishment targets for 2025, which, if achieved, could present further upside to our target prices. Meanwhile, profit margins are expected to improve further, e.g., GAMUDA (OP; TP: RM5.40) will benefit from a higher contribution of local revenue, while smaller builders are completing older projects that were previously impacted by post-Covid prolongation costs, which have now diminished. We maintain our OVERWEIGHT rating for the sector, with GAMUDA as our top pick. In addition, we continue to see a favourable risk-reward profile for mid-to-smaller-cap builders.

Strong contract flows to continue in 2025. According to the Construction Industry Development Board (CIDB), a total of RM185.1b in main contractor construction contracts were awarded YTD as of end-November 2024, surpassing the total contract awards of RM152.8b in 2023. However, this was still 23% below the previous upcycle record of RM241.0b in 2016 which included the lumpy East Coast Rail Link). With several public projects in the pipeline, coupled with robust private sector projects, especially in the data centre sector, 2025 is expected to be another busy year. We maintain our 3-year average annual contract awards assumption of RM180b over 2024−2026 which is an 11% growth against the previous upcycle average of RM161b in 2016−2018 (ex-ECRL award).

Several public projects in the pipeline. 2024 has been a relatively slow year for public project rollouts. The MRT3 underwent a three-month public inspection from October to December, and construction is expected to begin in 2026, with the entire line anticipated to be fully operational by 2032. If this timeline materializes, we believe 2025 could surpass the 2016 peak for contract awards. The Penang LRT Mutiara Line is still pending final negotiations between the SRS Consortium and MRT Corp. Other major projects in the pipeline include the Penang Airport expansion, the second phases of the Pan Borneo Highway and Sabah-Sarawak Link Road, and the Subang Airport redevelopment plan. We view the high-profile KL-Singapore High-Speed Rail as a medium-term prospect. Additionally, the Johor-Singapore Special Economic Zone (SEZ) presents significant opportunities for the sector.

Data centres to drive private project growth. Major tech giants such as Amazon, Google, Microsoft, and Oracle, along with other data centre operators, have announced significant investments in Malaysia's data centre sector. According to TENAGA (OP; TP: RM17.00), there are 7,200MW of data centre opportunities, with 4,700MW already secured. This translates to RM21b in construction contracts annually, assuming a rollout of 700MW per year. We believe large-cap builders such as GAMUDA, IJM (MP; TP: RM3.16), and SUNCON (MP; TP: RM4.52) hold a competitive edge due to their Industrial Building System (IBS) solutions, which enable faster project completion. Data centre projects are typically fast-tracked and demand shorter construction periods, a factor that naturally commands higher profit margins.

Contract wins to remain bullish in 2025. GAMUDA is highly likely to achieve an end-2024 outstanding order book of RM31.8b, within its target range of RM30b−RM35b. For 2025, GAMUDA has set an ambitious outstanding order book target of RM40b−RM45b. To meet this target, GAMUDA needs to secure at least RM22b in new jobs, compared to RM12.5b in job replenishments in 2024. We maintain our job replenishment estimates of RM14.5b for FY25 (YE: July, with RM8.47b in new jobs secured YTD) and RM17.0b for FY26, backed by projects such as the Penang LRT Mutiara Line, Sabah's water treatment plant, various data centre projects and Australian contracts. Should GAMUDA achieve its end-2025 target, we foresee more upside to our earnings estimates and target price. Similarly, SUNCON sees RM5.0b in new jobs in 2025, above our assumption of RM4.0b, while IJM projects about RM5.0b in job replenishments for FY26 (YE: March), compared to our assumption of RM4.0b. WCT (OP; TP: RM1.43) has set a bullish 2025 job win target of RM2.0b, exceeding our target of RM1.5b. Conversely, we believe KERJAYA (MP; TP: RM2.21)'s RM1.5b target is conservative, and we have a higher 2025 job win target of RM1.8b. For KIMLUN (OP; TP: RM1.36), our 2025 assumption remains aligned with 2024 at RM1.0b, slightly higher than its RM0.92b achievement in 2024.

Maintain OVERWEIGHT for the sector, anchored by GAMUDA for large caps, while we anticipate a better risk-reward profile for mid-to-small-cap builders such as KIMLUN and WCT. The current sector valuation is comparable to the 2016 upcycle at 20x PER, but we have applied a 10% premium, assigning a 22x multiple due to the projected 11% higher contract growth in this upcycle, as mentioned above. Upside potential exists for our target prices if contract rollouts exceed our assumptions and align with the companies' bullish targets. GAMUDA remains our top pick for the sector, supported by: (i) it being in the driver's seat for the Mutiara Line of the Penang LRT, (ii) its ability to secure new jobs in overseas markets, (iii) its solid war chest after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a record outstanding order book of RM31.8b, and (v) its inroads into the renewable energy space.

Source: Kenanga Research - 6 Jan 2025