• Maintain OVERWEIGHT. We remain upbeat on the construction sector, premised on favourable operating conditions – adequate labour supply and manageable cost pressures. Such conditions put contractors in a good position to accept new jobs (especially infrastructure jobs that are expected to be awarded in the medium term), which may further expand their orderbooks that are already showing signs of growth (Figure 1). Contractors that meet such criteria are Gamuda, Sunway Construction, and Kerjaya Prospek – which are our sector Top Picks.

• Out of the 11 companies under our coverage that reported results, four were in line, two exceeded expectations and five fell below estimates. The underperformance was mainly due to earlier billing progress assumptions being too optimistic. Nevertheless, topline growth was evident among most contractors, with earnings visibility improving (Figure 1) with the exception of earthworks and piling contractors. Looking ahead, we believe the adequate supply of labour should result in higher revenue recognition of projects as they move along the S-curve in the coming quarters.

• The total value of construction work done in 3Q23 grew by 9.6% YoY or 3.4% QoQ to MYR33.4bn – the highest in 14 quarters. Meanwhile, based on data from the Construction Industry Development Board (CIDB), project rollouts in general are still rather sluggish – MYR116.7bn worth of new contracts were awarded in 11M23, which is 15.3% lower YoY than 11M22’s MYR137.7bn. We think project awards may pick up from CY24 onwards – backed by the Government’s record-high development expenditure of MYR19bn allocated (2023: MYR17.6bn) for transportation projects in 2024.

• Key events to look out for in the near term include the rollout of the Penang Light Rail Transit (LRT) and potentially the Mass Rapid Transit 3 (MRT3, tender validity extended to end-Mar 2024 from end-Dec 2023) in 1Q24. Other notable anticipated developments stem from East Malaysia – especially Phase 2 of the Sarawak-Sabah Link Road and Phase 1B of the Sabah Pan Borneo Highway. Any icing on the cake would be a faster-than expected proposal submission for the Johor Bahru LRT by the Johor State Government to the Federal Government, while the Kuala LumpurSingapore High Speed Rail may yet materialise.

• Top Picks. Gamuda, Kerjaya Prospek and Sunway Construction are still our sector Top Picks, due to their commendable earnings visibility over the next four years. Gamuda has a sizeable presence overseas, while still maintaining relevance domestically. Kerjaya Prospek has a framework arrangement with Samsung C&T, which would enable it to secure more private sophisticated industrial jobs (backed by its net cash pile). We also like Sunway Construction for its diverse tenderbook consisting of the steady flow of internal jobs together with industrial infrastructure projects like the Song Hau 2 Power Plant project (pending financial close) in Vietnam – which could bring additional MYR6bn worth of orders.

• Key downside risks to our sector call are longer-than-expected delays in contract rollouts and larger-than-expected cost reductions for MRT3. 

Source: RHB Securities Research - 12 Dec 2023