• Maintain OVERWEIGHT. Top Picks include Gamuda, Sunway Constructionand Kerjaya Prospek. Infrastructure project flows are likely to dominateheadlines in the coming months (YTD contract flows for the Governmenthave exceeded that of last year). That said, we reiterate that other jobopportunities, particularly from industrial segments, should stay robust.

• What may keep investors on their toes going into 2025? Governmentprojects awarded in 9M24 were valued at MYR41bn – surpassing 2023’sMYR36.7bn. Well-flagged projects include Penang Light Rail Transit (LRT)(ground breaking in December), Pan Borneo Highway Sabah Phase 1B (cost:MYR15bn, with two final packages yet to be awarded) and whether or not anLRT or Autonomous Rapid Transit System will be implemented in JohorBahru. Hence, we believe that water-related infrastructure may bring newadditional opportunities for contractors. Projects include the SungaiDamansara flood mitigation project and the MYR4bn allocated for watermanagement in Perak, which includes providing treated water to Penang.

• Strong backing from industrial sub-sector. The overhang in industrialproperties declined in 1H24 to 746 units (1H23: 819 units) – coinciding withthe 23% YoY jump in industrial property transactions to MYR13.5bn in 1H24(1H23: MYR10.9bn) (Figure 1). Likewise, the number of industrial propertiesunder construction grew to 621 in 1H24 (1H23: 397) – not only exceedingthat of 2022 and 2023, but is more than half of what was recorded over 2017-2021 (Figure 2).

• Value of contracts awarded to non-residential sub-sector (comprisingcommercial buildings, factories, warehouses and data centres (DC)) ofMYR109bn for 9M24 has exceeded the 2023 (full-year) value of MYR83.5bn.The DC investment cycle is still ongoing with a new planned DC in Delapan,Kedah over 30 acres of land. Moreover, there is around 766.9MW of ITsupply of DCs committed in Malaysia, according to DC Byte. This translatesto MYR29-34bn of estimated construction value, based on a constructioncost of USD8.5-10m per MW in Malaysia, according to data from Arizton.Importantly, we have observed that sub-contractor packages from DC jobshave been awarded in relation to cooling systems, underground cable layingand water management works (Figure 5)

• Valuations. The Bursa Malaysia Construction Index (BMCI) is trading at aforward P/E of c.17x, ie above the 16x seen during the 2017 constructionupcycle (when industrial and water infrastructure jobs were not prevalent).While the BMCI is up >30% YTD, we still think that the sector is not yet ripefor profit-taking, as we envisage steadier news flow (in addition to theabovementioned water infrastructure and industrial prospects) to come inbetween now and 1H25. These include the evaluation of feedback on MRT3alignment post public inspection and the Government’s decision on theviability of the Kuala Lumpur- Singapore High Speed Rail by end-2024.

• Key downside risks: Delay in project rollouts, unexpected spike in buildingmaterial costs and unforeseen hurdles in hiring foreign workers.

Source: RHB Securities Research - 16 Oct 2024