Construction sector
Maintain neutral on respective sectors: Domestic contract awards to listed contractors totalled RM4.8 billion in 1Q19 (+20% quarter-on-quarter [q-o-q], +4% year-on-year [y-o-y]). Job awards increased healthily y-o-y mainly due to the resumption of major infrastructure projects after being reviewed by the government. To recap, project costs of light rail transit 3 (LRT3) and MRT2 were reduced by 47% (to RM16.63 billion) and 22% (to RM30.53 billion) respectively. We note that most of the contracts awarded in 1Q19 were mostly small to mid-sized ones (under RM500 million). Notable domestic contract wins during the quarter include the construction of the TNB campus (SunCon, RM781 million), construction of three blocks of apartments in Kuala Lumpur (Pesona Metro, RM409 million) and SUKE package CA2 (MRCB, RM323 million).

Although we do not expect the domestic construction industry prospects to go back to where it was during the period of pre-GE14, we opine that the worst is over for the industry.

Signs of recovery are: i) completion of costs review and resumption for some mega infrastructure projects; ii) revival of 121 infrastructure projects (RM13.9 billion) offered through direct negotiations and limited tenders by the previous government after cost review; iii) potential revival of the East Coast Rail Link in the near term; and iv) approval of high-impact projects under the mid-term review of the 11th Malaysia Plan such as Kulim airport (RM1.6 billion), logistics and manufacturing hub in Sidam (RM300 million) and construction of Phase 1A and 1B of the Northern Corridor Expressway (RM1.7 billion).

Job flows in Peninsular Malaysia slowed down significantly post GE14. We understand that industry players are aiming for jobs in Sarawak as the state government has allocated about RM9 billion for development expenditure under state budget 2019 which is the biggest in the history of the state. Funding for those projects is expected to come from Sarawak’s state reserves (about RM31 billion) which may insulate the projects from the risk of reduction of federal government spending.

Foreign contract awards amounted to RM615 million in 1Q19 (+315% q-o-q, +313% y-o-y), mostly from a marine bridge contract secured by Gamuda in Taiwan. We expect more domestic contractors to bid for foreign jobs given the continued slowdown in the domestic construction landscape. Contractors under our coverage that have expressed interest to compete for foreign jobs are Gamuda, Kimlun, SunCon, IJM and GKent.

Maintain “neutral” on construction post changes in federal government and scrapping of mega rail projects. — Hong Leong Investment Bank Research, April 3