Construction sector
Maintain neutral: Domestic contract awards to listed contractors totalled RM3.4 billion in the second quarter of 2019 (2Q19) (-30% quarter-on-quarter [q-o-q]; -19% year-on-year [y-o-y]). The decline in contract awards both q-o-q and y-o-y was mainly due to a smaller average contract size of RM115 million (1Q19: RM176 million; 2Q18: RM133 million).

Some of the sizeable contract wins in 2Q19 included: i) Bloomsvale Residences (RM439 million) for Kerjaya Prospek Group Bhd; ii) Duta Park Residences (RM406 million) for Fajarbaru Builder Group Bhd; and iii) Petronas Leadership Centre (RM406 million) for Sunway Construction Group Bhd (SunCon).

On a cumulative basis, first half of 2019 (1H19) domestic contracts totalled RM8.1 billion, falling 7% y-o-y. Infrastructure jobs made up 30% of domestic contracts year-to-date (YTD) with the balance from building jobs (1H18: 58% infrastructure; 42% building). The decline in contract value and lower proportion of infrastructure works were mainly due to holding back or downsizing of infrastructure projects post-14th general election. YTD, Sarawak-related domestic contracts amounting to RM681 million have been dished out and all of these contracts are infrastructure jobs. This verifies our view that the momentum of project flows in Sarawak is gaining traction as the next state election must be held before September 2021.

Infrastructure contracts that are expected to be rolled out in 2H19 are six bridge contracts with a combined value of RM2.4 billion under the Sarawak Coastal Road project and some packages from the East Coast Rail Link (ECRL) (RM44 billion). Another material development related to the sector is the recommencement of the light rail transit 3 project (RM16 billion) after a downsizing exercise and potential signing of a project delivery partner agreement for the Penang Transport Master Plan (RM24 billion).

Foreign contract awards in 2Q19 stood at RM48 million (-92% q-o-q; against zero foreign job in 2Q18). The steep q-o-q decline was due to a high-base effect from 1Q19 resulting from a marine bridge contract in Taiwan (RM522 million) awarded to Gamuda Bhd’s joint venture. Cumulative 1H19 foreign contracts were up by more than threefold due to absence of foreign contracts in 2Q18.

We are turning warmer on the construction sector given the positive news of several project revivals (the ECRL, Bandar Malaysia and potentially the Kuala Lumpur-Singapore high-speed rail). We believe the worst is over for the construction sector but this has been largely reflected in the run in the contractors’ share prices YTD with the Bursa Malaysia Construction Index up 46%.

IJM Corp Bhd is our top pick in the large-cap space as a beneficiary of the ECRL via construction contracts and the positive spillover effect on Kuantan Port (a 60% stake) and the Malaysia-China Kuantan Industrial Park (a 20% stake). Within the small- to mid-cap space, we like: i) SunCon as a well-managed pure construction play that is able to bid competitively within the increasingly open tender landscape; and ii) George Kent (Malaysia) Bhd which as the only domestic rail system specialist should benefit from the revival of rail projects. — Hong Leong Investment Bank Research, July 3