Construction stocks on Bursa have room to grow as current valuations unjustified, say analysts

• According to RHB, the sector recorded a high amount of RM159 billion of work done in CY2024, a 20% year-on-year increase.

KUALA LUMPUR (March 5): Construction stocks in Malaysia have room to improve from currently unjustified valuations, amid booming data centres and upcoming public projects, analysts said.

RHB Research noted that the Bursa Malaysia Construction Index (BMCI) is trading at a forward multiple of 15.2 times (versus 19 times in late 2024), following jitters from the US artificial intelligence (AI) diffusion rules and the rise of China's DeepSeek AI assistant early this year.

"In our view, the valuation is unjustified, as the BMCI was trading at a price-earnings ratio (PER) of around 15 to 16 times during the 2017 construction upcycle (in the absence of data centre prospects, which we envisage to remain commendable), coupled with the Works Ministry’s projected construction spending of RM200 billion in calendar year 2025 (CY2025)," the house said in a note on Wednesday.

According to RHB, the sector recorded a high amount of RM159 billion of work done in CY2024, a 20% year-on-year increase.

“Contractors will continue to be occupied with their respective jobs on hand as well as the upcoming ones," the research house noted.

RHB, which maintained its 'overweight' stance on the sector, cited fourth-quarter results that came in line with expectations. Out of nine companies under its coverage, three exceeded expectations, three were in line, and three fell below estimates.

The house's top picks for the sector include Gamuda Bhd (KL:GAMUDA), with a target price (TP) of RM5.83, Sunway Construction Group Bhd (KL:SUNCON), with a TP of RM5.63, and Binastra Corp Bhd (KL:BNASTRA), with a TP of RM2.21, which are well positioned to benefit from steady contract flows and solid earnings visibility over the next two years.

According to RHB, its top picks are evaluated based on diversification of the job portfolios that include renewable energy projects for Gamuda in Australia, data centres, and a sewage treatment plant for Binastra. 

RHB said that data centre prospects are likely to remain unchanged. Cushman and Wakefield reported 822 megawatts (MW) of planned capacity in Johor, while Negeri Sembilan is emerging as a 'hotspot', contributed by Gamuda's 389-acre land in Port Dickson that could support 500MW to one gigawatt of capacity.

RHB added that Tier 1 data centre developers in Malaysia are well positioned to mitigate risks from the US AI diffusion rules.

The sector’s growth is expected to be further fuelled by plenty of projects are ahead, including the estimated cost range of RM6 billion to RM7 billion for the Elevated Autonomous Rapid Transit (E-ART), the Kita Selangor rail line, and the reinstatement of five Light Rail Transit 3 (LRT3) stations.

RHB also stated that water related infrastructure could be an opportunity for construction companies as the Selangor government proposed a RM6 billion underground flood tunnel system. "Thirty-five flood mitigation projects are in the pre-implementation stage, while 73 are currently underway," said RHB.

However, the analysts cautioned about potential downside risks, including an unexpected slowdown in job roll-outs, labour shortages, and scaled-down data centre investments in Malaysia.

Meanwhile, CGS Research in a note said the market capitalisation between IJM Corporation Bhd (KL:IJM), Gamuda and Sunway Construction had widened to a five-year high, which made IJM's CY2025 PER of 12 times lower than Gamuda's 17 times and Suncon's 18 times.

"We like IJM for its strong construction franchise and its synergistic spun piles business," CGS analysts said, as they maintained their 'buy' call on IJM, with a TP of RM3.80. CGS stated that the valuation had not justified IJM's diversified earnings base, with recurring income from tolls and the Kuantan Port.

For this year, the FBM KLCI has dropped 4.61%, and the BMCI has declined 14.69%.

At the time of writing on Wednesday, shares of Gamuda were up 15 sen or 3.7% at RM4.25, with a market capitalisation of RM24.2 billion. Sunway Construction was up 17 sen or 4.2% at RM4.26, with a market cap of RM5.51 billion. Shares of Binastra were down one sen or 0.6% at RM1.73, with a market value of RM1.89 billion. IJM was five sen or 2.5% higher at RM2.04, with a market cap of RM7.44 billion.

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