• It said near-term job flows could be affected by the coming state elections while the highly anticipated the MRT3 project continues to see near-term delays.

KUALA LUMPUR (July 3): Hong Leong Investment Bank (HLIB) Research has maintained its “Neutral” rating on the construction sector and said it prefers to take a longer term view.

In a sector update on Monday (July 3), the research house said domestic re-rating catalysts are well anticipated by the market.

It said near-term job flows could be affected by the coming state elections while the highly anticipated the MRT3 project continues to see near-term delays.

“Top picks are unchanged, being Gamuda Bhd (Buy; TP: RM4.92) and Sunway Construction Group Bhd (Buy; TP: RM1.94).

“Both have contract win levers aside from the MRT3 project that could lead to a more sustained orderbook growth phase.

“Both companies are poised to sustain/enter earnings upcycle even on existing orderbook,” it said.

Reviewing 1H2023, HLIB said it turned out to be a decent period in terms of relative sector performance, riding on the back of sector heavyweight Gamuda (+16.4% YTD).

“Again, this was driven by foreign business developments while the Madani government’s green light for the MRT3 project was a big relief to the sector.

“Other developments which were helpful to performance are: (i) lower materials cost pressure, (ii) lower political noise post-GE15 and (iii) external weakness drove interest towards domestic oriented sectors,” it said.

HLIB said that after starting 1Q2023 on a strong note, registering RM7.2 billion worth of contract awards, 2Q2023 awards came in at circa RM7.5 billion (at the time of writing).

It said while 1Q2023 was driven by a surge post-GE15 in 4Q2022 (awards held back), 2Q2023 was boosted by Gamuda’s reclamation LOA (RM3.5 billion).

“Stripping this off, moderation is steeper coming in at RM4.0 billion (-44% q-o-q).

“We attribute this to normalisation and slowdown ahead of state polls. Looking ahead to the near-term, we reckon DE-funded projects could see sluggish pace in 3Q23 due to slow passing of Budget-23 and upcoming state elections (likely mid-Aug).

“Nevertheless, there are swing factors in 2H coming from mainly MRT3 (late CY2023), to a lesser extent airport expansion jobs (RM2-3 billion) and flood mitigation rollout (RM11 billion).

“Considering the Penang LRT does not yet have a fixed alignment nor financing arrangement, we expect material developments in 2024. As for opportunities in East Malaysia, flows are typically patchy for listed-Cos (low number of listed players),” it said.

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