• Sarawak is upping its ante with supercharged infrastructure. In light of the higher development expenditure (DE) allocated for Sarawak – not just at the federal, but state level, we view that catalytic infrastructure enhancement will take place. This is further backed by the state’s Post COVID-19 Development Strategy (PCDS) 2030, which aims to reach a GDP of MYR282bn by 2030 vs the estimated MYR146bn for 2023 based on the projection by Sarawak’s Economic Planning Unit.

• Key infrastructure components to look out for in Sarawak. We identified sectors such as water (pipe works, flood mitigation and water treatment plants), transportation (Kuching Autonomous Rapid Transit (ART) and several highway projects), and renewable energy (in the form of hydropower) via cascading dams and industrial gas production (hydrogen), coupled with the potential setup of data centres to present infrastructure expansion opportunities. New oil well discoveries off the shore of Sarawak combined with its location to be a prime spot for carbon capture and storage (CCS) may also drive the demand for related infrastructures.

• In a sweet spot to gain from foreign investments. Factors such as having the most competitive unsubsidised electricity tariffs in ASEAN, business friendly policies and abundant renewable energy sources (namely hydropower) have enabled Sarawak to attract foreign investors. Recall that the state saw foreign investments worth MYR12.4bn in 2022 compared to MYR9.4bn in 2021 – making it the also the third highest state in terms of foreign approved investments after Johor (MYR58.8bn) and Selangor (MYR33bn). Inflow of foreign investments may translate into the need of setting up infrastructure in industrial areas such as the Samalaju Industrial Park and Sarawak Petchem Industrial Park in Bintulu.

• Contractors set to benefit from Sarawak’s infrastructure wave. Even for 2022, Sarawak recorded the fifth largest value of construction projects among the country’s states, at MYR9.9bn. In terms of value of construction work done – Sarawak has seen a continuous increase since 2017, except in 2020 when the sector was hit by the pandemic. Sarawak recorded MYR14.6bn worth in terms of value of construction work done in 2023 (the fourth largest after Selangor, Federal Territory and Johor – representing a 5- year CAGR of 4.5%, which is commendable in comparison to most other states, which saw a decline.

• Sarawak infrastructure thematic stock ideas. KKB Engineering is the Top Pick for the Sarawak plays under our coverage given its diverse infrastructure exposure followed by IJM Corp which is gradually regaining its footprint in the state. We also take note of Gamuda’s track record in Sarawak via the Pan Borneo Highway (PBH) and Second Trunk Road (STR) projects. We also highlight Ibraco (IBRA MK, NR) as a non-rated idea for Sarawak.

• Key risks: Unforeseen pandemic outbreaks and unexpected downward revision in DE for the state

Source: RHB Securities Research - 19 Feb 2024