• Keep OVERWEIGHT; Top Picks: Gamuda, Kerjaya Prospek, Sunway Construction. Malaysia saw 983 flood incidents reported in 2022 vs 1,057 incidents in 2021 (Figure 1). Notwithstanding this, flood mitigation projects remain a crucial aspect for the country’s infrastructure. The Federal Government has allocated c.MYR11.8bn under Budget 2024 for flood mitigation projects spread across 33 high priority projects. This should benefit contractors with a track record in flood mitigation works.

• Economic impact from floods. In a joint report by the World Bank and Bank Negara Malaysia, estimations based on historical flood data saw that a hypothetical one-in-20 year flood can cost Malaysia up to 4.1% of its GDP along with a 2.2 ppt increase in the country’s unemployment rate (in the absence of adaptation efforts). With this in mind, we expect the Federal Government to expedite such projects in the coming months.

• The rollout for flood mitigation projects so far has seen Varia (VARIA MK, NR) receiving a subcontract worth MYR95m from Kator Construction in January to undertake the Klang River flood mitigation project in Section 25, Shah Alam. Separately, TRC Synergy (TRC MK, NR) secured a MYR24m job in Dec 2023 from the Department of Irrigation and Drainage to design and build a flood mitigation dam in Gombak, Selangor.

• Investable ideas in the flood mitigation space include Malaysian Resources Corp which has been shortlisted for a flood mitigation job in Selangor. This is not a surprise as MRCB is currently involved in the MYR380m Muara Sungai Pahang Phase 3 flood mitigation project. Aside from this, Kimlun Corp (KICB MK, NR) has expressed its intention to bid for flood mitigation projects which will most likely be in Johor given the group’s prominence in the state, in our view. We also do not discount the possibility of Rohas Tecnic (RTEC MK, NR) potentially clinching flood mitigation projects in the near future. This is premised on its involvement in the MYR85m job constructing pumping stations at two existing retention ponds and laying water pipelines to convey the water to the Semenyih Water Treatment Plant (WTP) intake.

• For East Malaysia, Naim Holdings (NHB MK, NR) stands out as the main beneficiary for flood mitigation jobs in Sarawak as it was involved Phase 1 (stage 1) of the Kuching flood mitigation project (completed in 2010) for MYR149m. Recall that Phase 2 of the Kuching flood mitigation project was highlighted as one of the 33 high priority projects under Budget 2024.

• Valuation. The Bursa Malaysia Construction Index is trading at a 15x forward P/E, above its 10-year mean of 12.7x. Nevertheless, the index was trading near a P/E of 16x in 2017 during the construction upcycle. We envisage that the anticipated rollout of flood mitigation projects could provide an additional impetus (on top of other big ticket projects such as Mass Rapid Transit 3 and Penang Light Rail Transit) for the index to potentially move higher than what was seen in 2017.

• Key risk: Longer-than-expected delays in contract rollouts

Source: RHB Securities Research - 26 Mar 2024