RHB IB upgrades construction sector to 'overweight'

• It noted that as Mass Rapid Transit 3 (MRT3) contract rollout could likely take a longer time — sometime in late 4Q2023 or early 1Q2024 — contractors may fill in the temporary void of local infrastructure jobs by focusing on industrial ones. 

KUALA LUMPUR (June 12): RHB Investment Bank (RHB IB) has upgraded the construction sector to 'overweight' from 'neutral' mainly due to its upgrade on Gamuda Bhd, which accounts for 36.5% weightage on the KL Construction Index.

"Additionally, we take note of dissipating headwinds in the form of a more manageable building material cost environment and reasonable supply of labour to support construction progress,” it said in a note on Monday (June 12).

The research house views it as a strategic hedge for any downside risks stemming from the domestic construction sector, with top picks being Gamuda, Sunway Construction Group Bhd (SunCon), and Kerjaya Prospek Group Bhd.

Overall, RHB IB believes the three construction groups can weather any downside risks pertaining to local big ticket infrastructure jobs. 

It noted that Gamuda has a sizeable presence overseas as over 70% of its order book comes from overseas. Meanwhile, net-cash Kerjaya Prospek has a framework arrangement with Samsung C&T that enables it to be exposed to more private sophisticated jobs. 

“We also favour SunCon for its diverse tender book comprising internal jobs plus data centres and factories, under which the Song Hau 2 Power Plant project in Vietnam (pending financial close) could boost the order book by circa RM6 billion,” it added.

RHB IB said the value of construction work done in the first quarter of 2023 (1Q2023) reached RM32.2 billion, up 9.2% year-on-year. During this same period, the construction sector’s economic output grew 7.4% year-on-year (y-o-y), marking the fourth consecutive quarter of y-o-y growth, it added.

Meanwhile, it noted that as Mass Rapid Transit 3 (MRT3) contract rollout could likely take a longer time — sometime in late 4Q2023 or early 1Q2024 — contractors may fill in the temporary void of local infrastructure jobs by focusing on industrial ones. 

“Prospects for industrial properties remain resilient considering foreign investments, eg data centre providers from Singapore relocating to Malaysia,” it added.

RHB said the 1Q2023 underperformance was a “temporary blip”, adding that out of the 10 companies that reported results, one came in line, one exceeded expectation, and eight fell below estimates. 

“Most contractors had projects that were still at their initial stages. Hence, progress billings have yet to pick up. We believe the adequate supply of labour should result in higher revenue recognitions for projects while building materials cost pressures dissipate as projects without cost escalation clauses — secured before the Russia-Ukraine conflict — approach their tail-end,” it added.

RHB IB said near- to medium-term pockets of opportunities may also arise from the rollout of other infrastructure projects, particularly the remaining phases of the Pan Borneo Highway Sabah and Sarawak, and the Bayan Lepas Light Rail Transit.