Construction companies set to benefit from big infrastructure projects

KUALA LUMPUR: The transportation sector is set to further drive the construction industry forward, RHB Research says.

Key rail projects that are pending and which may be built soon include the Penang Light Rail Transit (LRT), Klang Valley Mass Rapid Transit 3 (MRT3), the Johor Bahru LRT and the Kuala Lumpur-Singapore High Speed Rail projects.

The research house said the total value of construction work done in the third quarter of 2023 grew by 9.6% year-on-year, or 3.4% quarter-on-quarter, to RM33.4bil, the highest in 14 quarters.

Other notable anticipated developments will also come from Sabah and Sarawak, namely Phase 2 of the Sarawak-Sabah Link Road and Phase 1B of the Sabah Pan Borneo Highway.

“We remain upbeat on the construction sector, premised on favourable operating conditions, adequate labour supply and manageable cost pressures.

“Such conditions put contractors in a good position to accept new jobs, especially infrastructure jobs that are expected to be awarded in the medium term,” said RHB Research.

“We think project awards may pick up from calendar year 2024 onwards, backed by the government’s record-high development expenditure of RM19bil allocated (2023: RM17.6bil) for transportation projects in 2024,” the research house said.

This could further expand their order books that are now already showing signs of growth, the research house added.

It pointed out that companies such as Gamuda Bhd, Sunway Construction Group Bhd and Kerjaya Prospek Group Bhd, will have commendable earnings visibility over the next four years.

“Topline growth was seen among most contractors, with earnings visibility improving with the exception of earthworks and piling contractors.

“Looking ahead, we believe the adequate supply of labour should result in higher revenue recognition of projects as they move along the S-curve in the coming quarters,” RHB Research said.

The three companies mentioned are RHB Research’s top sector picks. It also noted that Gamuda has a sizeable presence overseas, while still maintaining relevance domestically.

Kerjaya Prospek has a framework arrangement with Samsung C&T Corp, which would enable it to secure more private, sophisticated industrial jobs and it is backed by its net cash pile.

“We also like Sunway Construction for its diverse tenderbook consisting of a steady flow of internal jobs together with industrial-infrastructure projects like the Song Hau 2 Power Plant project (pending financial close) in Vietnam which could bring an additional RM6bil worth of orders,” the research house said.

It maintained its “overweight” rating on the construction sector, and said it remains upbeat on the sector, premised on favourable operating conditions of adequate labour supply and manageable cost pressures.

“Key downside risks to our sector call are longer-than-expected delays in contract roll-outs and larger-than-expected cost reductions for the MRT3 project,” the research house said.