Kenanga Research & Investment

Construction - The Wait is Over

Publish date: Tue, 26 Sep 2023, 09:27 AM

We remain OVERWEIGHT on the construction sector. With the state elections done and dusted, we expect a wave of public infrastructure projects to hit the market soon, such as MRT3, Bayan Lepas LRT and various large-scale flood mitigation projects. The Mid-term Review of the 12th Malaysia Plan (12MP) projects an annual gross development expenditure of RM88.1b over 2023-2025, which is significantly higher than RM64.3b and RM71.6b in 2021 and 2022, respectively. Similarly, the private sector construction market will stay vibrant, underpinned by massive investment in new semiconductor foundries and data centres. Our top sector picks are GAMUDA (OP; TP: RM5.45), IJM (OP; TP: RM2.15) and SUNCON (OP; TP: RM2.39) which we believe will extend their winning streaks for new jobs in an even more exciting construction market in 2024.

Public projects to hit the market. The Mid-term Review of the 12MP projects gross development expenditure of RM264.4b in the period 2023-2025, translating to an annual allocation of RM88.1b which is higher than RM64.3b in 2021, RM71.6b in 2022 and an average of RM49.7b in the 11th Malaysia Plan (11MP). However, we are not taking the numbers entirely at their face value as part of the increases is to keep up with cost inflation while a big chunk of gross development expenditure typically goes towards maintenance and upkeeping of existing public infrastructure, and funding of small-scale rural projects. These will largely benefit privately-owned small construction outfits.

However, equally high on the government agenda, is people mobility particularly accessibility to an efficient public transport system. High on the priority list are the RM45b MRT3 or MRT Circle Line which provide connectivity to the existing MRT, LRT, monorail and train lines through interchange stations, as well as the RM9.5b Bayan Lepas LRT, which will help to ease the chronic traffic congestion in Penang island. Coupled with the roll-out of six flood mitigation projects reportedly to be worth RM13b including flood mitigation works at Sungai Johor (Johor), the construction of the Sungai Klang-Sungai Rasau dual-function reservoir (Selangor) and the Sungai Golok Integrated River Basin Development Phase 3 (Kelantan), we believe there will be enough jobs to go around for public listed small, mid-sized and large contractors.

Timelines of MRT3 and Penang LRT likely in 2024. We understand that MRT Corp has sought consent from the bidders of MRT3 work packages to extend the validity of their tenders to end-2023 (from Sep 2023). This goes to show that MRT Corp is actively implementing the project, although it needs to undertake more thorough scrutiny on its design, specifications, alignment and funding mechanism. This RM45b MRT3 Circle Line is the critical final piece to complete KL’s urban rail network, connecting it to existing MRT, LRT, KTM and Monorail lines through 20 interchange stations. Once completed, it will further encourage public transport usage in KL. Meanwhile, MRT Corp on 21 Aug 2023 released a request for proposal (RFP) for Bayan Lepas LRT for the appointments of design consultancy service (submission dateline: 02 October) and connectivity and mobility study consultancy services (submission dateline: 18 September). We believe the project, now fully-funded by the federal government, could potentially get off the ground sooner as it is no longer constrained by the availability of profits and cash flows from a reclamation project. The government, via the transport ministry, is currently ironing out details with project delivery partner SRS Consortium which is led by GAMUDA, and physical work could commence by early-2024.

HSR is kept “warm”. Similarly, MyHSR Corp also in July 2023 released a request for Information (RFI) on the KL-Singapore High Speed Rail (HSR) based on a public-private partnership model with closing date for submission on 15 Nov 2023. More than 700 local and foreign participants, representing the full spectrum of the HSR project attended the RFI briefing on 27 Jul 2023. This proposed HSR, which was cancelled in early 2021, will have a huge impact to the construction sector given its sizeable project value, estimated at c.RM60b previously. However, given the complexity of the project, which involves cross-border cooperation and sources of funding, it is still too early to set a timeline as to when construction will start.

For on-going projects in East Malaysia such as Pan Borneo Highway and Sabah-Sarawak Link Road, the government has earlier provided commitment to accelerate and expedite these projects. According to the Mid-term Review of the 12MP, Pan Borneo Highway Sarawak Phase 1 is 92% completed while the Phase 1A in Sabah is 74% completed. Given its involvement in the Sarawak-Sabah Link Road project, KIMLUN (MP; TP: RM0.91) is keen to bid for work packages from Pan Borneo Highway Sarawak Phase 2 while IJM has also shown interest.

The private sector job market is expected to continue growing as multinational corporations (MNCs) diversify their manufacturing bases away from China to reduce concentrated geo-political risks. This shift has created new opportunities in the construction sector, particularly in the establishment of semiconductor plants and data centres. These projects come with larger contract sizes (ranging between RM1b to RM1.5b each) and a much shorter timeline versus conventional contracts – enabling contractors to command a premium. TENAGA (OP; TP: RM11.15) revealed that over the next 12 months, five new data centres that will consume a total of 2,000MW of electricity will come on-line. SUNCON and KERJAYA (OP; TP: RM1.50) have already bagged such private sector contracts since 2022.

We now value large-cap builders at 18x forward PER. We believe the construction sector is poised for a re-rating with the roll out of mega infrastructure projects in 2024. As such, we now value large-cap contractors, i.e., GAMUDA, IJM and SUNCON at 18x forward PER, and mid-cap and small-cap players KERJAYA at 14x, WCT (OP; TP: RM0.74) and KIMLUN at 10x. Meanwhile, we also reduce our RNAV discount for property arms of GAMUDA, IJM and WCT in view of the improved sentiment towards property stocks in general. Hence, we raise our TP for GAMUDA to RM5.45 from RM5.15; IJM to RM2.15 from RM1.75; SUNCON to RM2.39 from RM2.12; KERJAYA to RM1.64 from RM1.53; WCT to RM0.74 from RM0.61; and KIMLUN to RM0.91 from RM0.82. Consequently, we upgrade IJM to OUTPERFORM from MARKET PERFORM while keeping our recommendations for other stocks.

We reiterate OVERWEIGHT for the construction sector and our sector top picks are:

i. GAMUDA for: (i) being the front-runner for the tunnelling job for MRT3, (ii) its ability to secure new jobs in overseas markets, (iii) its strong war chest after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a record outstanding order book of RM21.5b, and (v) its inroads into the renewable energy space.

ii. IJM for: (i) it is poised to garner a slice of action in the imminent mega rail projects, i.e. MTR3 and Bayan Lepas LRT given its involvement in the previous MRT and LRT projects, (ii) its strong earnings visibility underpinned by an outstanding construction orderbook of RM4.9b and unbilled property sales of RM2.5b, and (iii) Kuantan Port’s position as the largest port in the East Coast capturing export and import activities growth.

iii. SUNCON for: (i) its extensive capabilities and track record in building, infrastructure, solar, mechanical, electrical and plumbing works, (ii) its strong earnings visibility underpinned by a record outstanding order book of RM11.9, (iii) its strong balance sheet that enables it to carry out projects for local and overseas clients based on a deferred payment model; and (iv) recurring jobs from parent and sister companies.


Source: Kenanga Research - 26 Sept 2023

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