Construction sector valuation improves on easing Iran war risks, job acceleration — HLIB

KUALA LUMPUR (July 6): Valuations for the construction sector have turned more favourable following the easing of Iran war headwinds and expected job flow acceleration for the rest of the year, said Hong Leong Investment Bank (HLIB).

"The sector has also turned more favourable following the sector-wide de-rating due to the Iran war. With war-related headwinds easing going into 2H2026 (the second half of the year), we see an improving risk and reward profile," said the research firm in a note on Monday.

The KL Construction Index, down 14% in the first quarter of 2026 on Iran war fears, pared its year-to-date loss to roughly 5% in 2Q2026 as cost clarity, easing geopolitical tensions, and steady contracts eased margin worries.

“Although some degree of margin compression is likely in 2Q2026, we believe the worst of the war-related headwinds are now behind for contractors.

"Our checks indicate that prices of key inputs such as steel, ready-mixed concrete (RMC) and industrial diesel are [now] retreating towards pre-war levels since June amid progress in the US-Iran peace deal,” the bank said.

Easing geopolitical tensions are also expected to aid residential flows in 2H2026 as developers regain confidence to launch new projects amid a more favourable cost environment and improving homebuyer sentiment.

HLIB named Sunway Construction Group Bhd (KL:SUNCON), with a 'buy' rating and a target price of RM9.10, and IJM Corp Bhd (KL:IJM), with a 'buy' call and a TP of RM3.02, as its top picks in the sector.

Overall, the bank maintained its ‘overweight’ stance on the sector underpinned by expectations of accelerating job flows in 2H2026. As of 2Q2026, total local job flows had risen to RM16.9 billion.

This comes as contract award momentum remained resilient due to robust acceleration in data centre main package awards, crystallisation of various subcontracting opportunities within the DC space, and conversion of big-ticket infrastructure jobs such as the Ulu Padas water supply scheme.

Furthermore, the bank anticipates greater clarity in timeline surrounding the roll-out of large-scale infrastructure projects under Budget 2027 ahead of the 16th general election.

“In addition to a pipeline of water and flood mitigation projects, our key expectation for Budget 2027 is a reaffirmation of the government’s commitment to the MRT3 Circle Line project.

“As land acquisition forms substantial actions in 2026, we expect tender activities to gather pace in 2027,” it added.

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