RHB Investment Bank (RHB IB) maintained OVERWEIGHT call on Construction sector for the year ahead despite a “temporary blip” shown in the lower total value awarded to contractors in 2023.
In its Malaysian Sector Update today (Jan 3), the research house said that the total value of projects awarded to contractors in 2023 stood at RM127.4 billion, 22% YoY lower than the RM163.2 billion seen in 2022, according to the Construction Industry Development Board (CIDB).
“Nonetheless, we view this as a temporary blip – contract rollouts are expected to be backed by the government’s RM90 billion development
expenditure (DE) allocated for 2024, with 21% of DE focusing on the transport subsector versus 18% in 2023.
The research house said government projects saw a 33% year-on-year (YoY) drop in value awarded during 2023, reaching RM29 billion, compared to RM43.9 billion in 2022.
“Among the type of projects – infrastructure recorded the largest annual drop in terms of project value, a decrease of 47% YoY (amid the dearth of big scale public jobs in 2023), followed by residential at a 37% YoY drop.
“However, non-residential projects bucked the trend, rising 4% YoY to reach RM76.8 billion,” it said.
For this year, RHB IB highlighted the key events it is anticipating in 2024, saying that in the first half of the year, awards may pertain to flood mitigation projects, the Penang Light Rail Transit (LRT), Pan Borneo Highway Sabah Phase 1B and the reinstatement of the five LRT3 stations.
“As for the Mass Rapid Transit 3 (MRT3), we take comfort that the government is going ahead with the land acquisition process for the project.
“According to MRT Corp, the notification of identified land is expected to start in 2Q24 with the finalisation of land to be acquired taking place in 3Q24. Therefore, we assume that MRT3 awards could take place from 4Q24,” it added.
Other than that, it is also anticipating upcoming catalysts for the sector include a higher participation of Malaysia-based contractors in Indonesia’s new capital project.
“So far, IJM Corp is eyeing the Nusantara state civil servant housing project (worth RM1 billion), while there have been other several Malaysian companies which submitted letters of intent in 2022 which are being evaluated by the Nusantara Capital Authority,”
It added another catalyst is a quicker-than-expected rollout for the proposed three lines of the Johor Bahru Light Rail Transit, as the Joho government was reported to be set in submitting the project’s proposal to the Federal Government in late November 2023.
In terms of valuations, Bursa Malaysia Construction Index is trading at a 13x P/E, slightly above its 10-year mean of 12.7x, RHB IB said.
“Notwithstanding this, the index was trading at 15.5x in mid-2017 during the construction upcycle. With commendable catalysts in store for the sector, we view the current valuation of the index to be undemanding and as such, an attractive level to enter,” it elaborated.
Environmentally, the research house noted that there has been a slew of contractors such as Sunway Construction Group Bhd (SunCon), HSS Engineers Bhd participating in renewable energy-related initiatives such as the Corporate Green Power Programme (CGPP).
“Separately, construction giants such as Gamuda Bhd recently announced its participation to jointly develop the 187.5MW Upper Padas Hydroelectric Dam with Sabah Energy Corporation and Kerjaya Kagum Hitech JV.”
The key downside risks to its call include longer-than-expected delays in job rollouts and larger-than-expected cost cuts for MRT3.
As for top picks, RHB IB named Gamuda (GAM MK; BUY; TP 5.66), SunCon (SCGB; BUY; TP RM1.71) and Kerjaya Prospek (KPG MK; BUY; TP RM1.71).
