Highlighted Companies
Gamuda ADD, TP RM4.35, RM3.98 close
We expect Gamuda’s rail and tunnelling credentials from MRT 1 and 2 to give it a strong advantage over other bidders for the MRT 3 underground package, which we estimate to be worth RM11bn for the MMC-Gamuda JV (50:50). End-Oct net gearing stood at 0.18x.
HSS Engineers ADD, TP RM0.85, RM0.405 close
Securing the RM998m MRT 3 PMC package is a huge positive for HSS – backed by its strong track record in past MRT projects. We like HSS Engineers given rising demand for engineering and project management services (EPMS) during the sector’s post-pandemic recovery cycle.
IJM Corp Bhd ADD, TP RM2.09, RM1.72 close
A stronger balance sheet post the sale of IJM Plantations, with end-Mar net gearing of 0.26x, positions IJM Corp as a strong contender for the tier-1 civil works packages of MRT 3, which have a private sector funding element.
Reality check on pre-Budget job flows
- Job flow data are showing signs of contract awards tapering off in 2HCY22F, reinforcing our view of a muted 2H ahead of Budget 2023 and GE15.
- We anticipate Budget 2023’s DE to focus on stimulus packages for smaller contractors; positive surprises in terms of new major infra initiatives unlikely.
- Despite sector overhang risks, we remain upbeat on large-cap contractors with a robust (domestic and overseas) job outlook and superior margins.
- Reiterate sector Neutral rating; we still prefer Gamuda, IJM Corp and HSS.
Sector value of contract awards could decline 15% yoy
Contract flow stats from the Construction Industry Development Board (CIDB) point to a likely slowdown in the value and number of projects awarded for the remaining part of the year. As at YTD Aug, total value of contracts awarded amounted to RM74bn which, if annualised, works out to RM111bn or an implied 15% yoy decline from 2021’s RM131bn. Job flow data show signs of contract awards tapering off in 2HFY22F, reinforcing our view of a muted 2H ahead of Budget 2023 and the 15th General Elections (GE15). Tenders for certain categories of government/private sector contracts which may have been temporarily delayed (due to the sharp rise in raw material costs and labour issues) are one of our key findings post-2QFY22F results season.
What’s in store for the sector in Budget 2023?
We anticipate that the priority and project mix under Budget 2023’s development expenditure (DE) (to be tabled on 7 Oct) will focus on assisting and expediting ongoing infrastructure contracts that, despite the lifting of lockdowns and reopening of the economy since 4QCY21, are still negatively impacted by the rise in material costs, labour shortage and higher labour costs. We therefore would not discount the inclusion of selected stimulus measures to assist smaller contractors. For larger contractors, we believe new mega
contract proposals beyond those that have been approved in the last 6-12 months are unlikely to be introduced in Budget 2023, given that the immediate focus (including financing priorities) is the implementation of the RM31bn MRT 3 (Circle Line).
Sector themes and Neutral rating intact
We reiterate our Neutral call on the construction sector and continue to advocate selective exposure to contractors. Political/election uncertainties, rising material prices, labour shortage risks and the government’s cautious stance on roll ing out mega projects are key overhang risks. In light of uncertainties in the rollout of new larger-value contracts ahead of Budget 2023, and sustained sector headwinds pre-GE15, we continue to prefer contractors with the following themes: 1) asset divestment via highway asset sales; 2) stronger balance sheet positions with special dividends in the pipeline; 3) improving order book growth outlook; 4) advantage in clinching tier-1 MRT 3 civil works packages and 5) strong overseas order pipeline. In the big-cap space, we continue to prefer Gamuda (top pick) and IJM Corp. In the small-cap space, HSS Engineers remains ours preferred pick.
