Contractors should focus on industrial properties and data centre jobs, says RHB IB

• In a research note on Friday (Jan 27), RHB stated that the new Budget 2023 could see a downward revision or reallocation of the previously budgeted RM95 billion development expenditure, while the sizeable Borneo block n the unity government will have positive implications for higher revised expenditure for Sarawak and Sabah.

KUALA LUMPUR (Jan 27): RHB Investment Bank Research has maintained its "neutral" call on the construction sector, after considering the risks in public infrastructure projects, but advocated that contractors focus on newer projects, such as data centres and industrial jobs.

In a research note on Friday (Jan 27), RHB stated that the new Budget 2023 could see a downward revision or reallocation of the previously budgeted RM95 billion development expenditure, while the sizeable Borneo block n the unity government will have positive implications for higher revised expenditure for Sarawak and Sabah.

“Consequently, we prefer contractors with limited exposure to government-related projects,” said RHB analyst Adam Mohamed Rahim.

“So far, as of Jan 20, the government has given preliminary approval for an additional allocation of RM1 billion to upgrade Sabah and Sarawak’s border infrastructure.

“Notwithstanding this, we believe the bulk of the allocation may flow towards smaller-sized contractors that are not publicly listed.”

In terms of the total value of projects awarded in 2022, RHB stated that it increased 1% year-on-year (y-o-y) to RM134.5 million, with the value of government projects lower by 15% y-o-y at RM37.4 million, while private projects improved by 9% to RM97.1 million. The number of projects awarded also dropped by 16.5% y-o-y to 11,163 projects.

“This indicates a sluggish roll-out of government-related jobs that usually include infrastructure works. As at Jan 24, RM1.2 billion worth of private projects have been awarded so far in 2023, versus only RM200 million of government projects during the same period,” said Adam.

Nevertheless, the analyst stated that the industrial property segment remains resilient post Covid-19 pandemic, and China’s reopening could lead to an increase in foreign direct investment (FDI).

“The industrial property segment remains resilient post pandemic, with active industrial property transactions in 9M2022 (the cumulative first nine months of 2022).

“Malaysia saw RM15.3 billion worth of industrial properties — factories, warehouses, and manufacturing facilities — transacted in 9M2022 (9M2021: RM11.3 billion), representing a 35% y-o-y growth.

“Overall, China’s reopening could lead to an increase in FDI — particularly for the manufacturing sector. This is further facilitated by the fact that Malaysia is one of China’s export partners.”

RHB’s top picks for the sector include Kerjaya Prospek Group Bhd and Sunway Construction Group Bhd. Kerjaya Prospek is in a framework arrangement with Samsung C&T that is expected to enable the group to secure more industrial jobs, backed by its net cash pile.

“We gathered that Samsung C&T’s focus with Kerjaya Prospek will be more on the electrical and electronics segment, given the former’s past experience in completing the semiconductor fab complexes in Hwaseong and Giheung (both in South Korea), and Austin, Texas in the US.

“Therefore, we do not discount the possibility of Kerjaya Prospek venturing into more sophisticated infrastructure and building projects of higher value, in addition to industrial jobs under the framework agreement with Samsung C&T.

“Sunway Construction [on the other hand] is favoured for its aim to venture into local data centre construction jobs. These are usually dominated by private foreign contractors like Takenaka Corp.

“Due to the aforementioned points, we continue to prefer Sunway Construction and Kerjaya Prospek as our top picks, given their low reliance on public infrastructure projects that are undergoing scrutiny, as the government prioritises managing the country’s fiscal position.”

Key risks in the construction of data centres include a potential labour shortage that could lead to the extension of projects with shorter timelines, and intensified competition from other contractors.

RHB has "buy" calls on Kerjaya Prospek (target price: RM1.44) and Sunway Construction (RM2.07).