Dissipating headwinds in the form of a more manageable building material cost environment and reasonable supply of labour to support construction progress has resulted in its possible recovery
In viewing these factors as a strategic hedge for any downside risks stemming from the domestic construction sector, RHB Equity Research has placed an OVERWEIGHT call, upgrading their sector call premised mainly on their upgrade for Gamuda (36.5% weightage of the KL Construction Index) to BUY from Neutral.
The value of construction work done in 1Q23 reached MYR32.2bn (+9.2% YoY). During this same period, the construction sector’s economic output grew 7.4% YoY, marking the fourth consecutive quarter of YoY growth, RHB said today (June 12) in its Malaysia Sector Update.
While the Mass Rapid Transit 3 (MRT3) contract rollout could likely take a longer time – sometime in late 4Q23 or early 1Q24 – contractors may fill in the temporary void of local infrastructure jobs by focusing on industrial ones. Prospects for industrial properties remain resilient in light of foreign investments, eg data centre providers from Singapore relocating to Malaysia. \
The 1Q23 underperformance was a temporary blip, in their view as out of the 10 companies that reported results, one came in line, one exceeded expectations, and eight fell below estimates.
Most contractors had projects that were still at their initial stages. Hence, progress billings have yet to pick up.
RHB believes the adequate supply of labour should result in higher revenue recognitions for projects while building materials cost pressures dissipate as projects without cost escalation clauses – secured before the Russia-Ukraine conflict – approach their tail-end.
Near- to medium-term pocket of opportunities may also arise from the rollout of other infrastructure projects, particularly the remaining phases of the Pan Borneo Highway (PBH) Sabah and Sarawak, and the Bayan Lepas Light Rail Transit (BLLRT).
These projects have received positive updates by the Government. Prime Minister Dato’ Seri Anwar Ibrahim has urged for the adoption of a fast-track approach for PBH and allocated funds for the BLLRT, which was previously supposed to be state government funded.
RHB has introduced Gamuda as a new Top Pick in addition to KPG and SunCon.
Overall, the research house believes it can weather any downside risks pertaining to local big ticket infrastructure jobs.
Gamuda has been preferred die to a sizeable presence overseas (>70% of orderbook comes from overseas).
Meanwhile, KPG has a framework arrangement with Samsung C&T that enables it to be exposed to more private sophisticated jobs (backed by its net cash pile).
RHB said they also favour SunCon for its diverse tenderbook comprising internal jobs plus data centres and factories, under which the Song Hau 2 Power Plant project in Vietnam (pending financial close) could boost the orderbook by c.MYR6bn.
Key downside risks to RHB’s sector call are longer-than-expected delays in contract rollouts and larger-than-expected cost reductions for MRT3.
