PETALING JAYA: The potential for a broad rally in the construction sector remains capped despite its impending recovery driven by the revival of the East Coast Rail Link (ECRL) and the Bandar Malaysia porjects, says Hong Leong Investment Bank Research (HLIB Research).
“In spite of the recovering landscape, absent of further details and timeline clarity for additional mega infra catalysts (HSR & MRT3), we believe current valuations have baked in the recovery prospects capping the potential of a broad sector rally,” it said in a report today.
“Nonetheless, positive news flow and healthy order book levels should provide downside risk protection.”
As for the construction sector recovery, HLIB Research said domestic contract awards in fourth quarter 2019 totalled RM1.9 billion (+72% quarter on quarter (qoq), -53% year on year (yoy), bringing the total for 2019 to RM11 billion, a 40% drop on-year.
It said the increase in contract awards on a quarterly basis was due to a jump in the number of contracts from 12 to 20 in Q4 19.
Meanwhile, foreign contract awards in the quarter declined to RM127 million (Q3 19: RM918 million, Q4 18: RM148 million).
“The steep qoq decline was primarily due to high base in Q3 19 as 13 piling contracts in Singapore (RM327 million) were awarded to Pintaras Jaya coupled with road construction contract in Iraq awarded to Bina Puri (RM303 million),” said HLIB Research.
It said that on a y-o-y basis, a murky picture remains with contract awards sliding, declining by 53% as contract awards decreased to 20 from 32 (Q4 18), compounded by a 64% decrease in average contract value.
“Cumulatively, CY19 foreign contracts were up by more than fourfold due to a combination of domestic contractors shifting focus overseas post-GE14, further buoyed by absence of foreign contracts most notably in Q2 18.”
In 2019, Sarawak-related domestic contract awards amounted to RM964 million with 78% being infrastructure related.
HLIB said it reckoned that the momentum of project flows in Sarawak will reaccelerate after slowing down in 2H19 as the next state elections must be held before September 2021.
On the whole, it highlighted that the infrastructure contracts that are expected to dominate in 1H20 are ECRL (RM44 billion), Pan Borneo Sabah (RM12.3 billion), Sarawak Coastal Road Network (RM6 billion) and Second trunk road (RM5 billion).
HLIB maintains a neutral rating on the construction sector, with SunCon as its top pick (buy, target price: RM2.30) due to ample balance sheet capacity, positive earnings trajectory and strong support from parent company.
It also recommends HSL ((buy, target price: RM1.64) as it is a proxy to the Sarawak construction upcycle.
