• Maintain OVERWEIGHT. Top Picks include Gamuda, Sunway Construction, and Kerjaya Prospek. Out of the 10 companies under our coverage that reported results, seven were in line and three fell below estimates. All in, we view that contractors should continue booking in better progress billings as evident from the MYR41bn (+23% YoY) total value of work done – the highest on record.

• Contract rollouts (private and Government) have been active so far with MYR183.7bn worth of construction projects awarded in 11M24 – 20% YoY higher than the MYR152.9bn recorded for the full year of 2023 and set to be the highest annual value since 2016 when MYR241bn worth of contracts were dished out. Likewise, the government projects awarded in 11M24 worth MYR51.5bn has surpassed the annual previous high of MYR50.6bn in 2016, indicating that the public sector awards are picking up pace.

• Non-residential building prospects (including data centres (DC) and industrial facilities) remain robust with MYR138.8bn worth of contracts awarded in 11M24 vs MYR83.6bn in 2023. This comes as no surprise as Selangor has approved MYR34.9bn of investments in 1H24 vs MYR29.7bn in 1H23. Moving forward, there is an upcoming supply of 11.3m sq ft of warehousing/logistics space coming into the market until 2027 from the 55.3m sq ft available in 1H24, according to Savills Malaysia.

• With most major contractors moving up the value chain to undertake more sophisticated jobs such as DCs and industrial facilities instead of property building projects, this may provide ample opportunities for medium-sized contractors, ie Vestland (VLB MK, NR) and Inta Bina (INTA MK, NR). This is evident from the National Property Information Centre data showing that the number of overhang residential units in Malaysia dropped to 22,642 units in 1H24 vs 36,863 units in 2021.

• Sentiment moving forward. While the Mass Rapid Transit 3 is expected to begin construction in 2027, we envisage there are other opportunities aside from the Penang Light Rail Transit and the abovementioned points that may support sentiment. Upcoming projects, ie the West Ipoh Span Expressway (c.MYR6.2bn), Penang Airport expansion (c.MYR1.6bn), and the Sarawak deep sea port project (between MYR25bn and MYR30bn), along with around 766.9MW of IT supply of data centres committed in Malaysia according to DC Byte, may translate to MYR29-34bn worth of construction jobs.

• Top Picks include GAM, KPG, and SCGB, amid steady contract flows combined with commendable earnings visibility over the next two years. Key downside risks to our sector call are unexpected slowdown in job rollouts, sudden labour shortages, and Malaysia’s risk of being flagged as a launch pad for China’s access to high-end chips banned by the US (which could impede DC prospects).

Source: RHB Securities Research - 4 Dec 2024