Project rollouts likely to accelerate in construction sector – Kenanga Research

KUALA LUMPUR: The construction sector is expected to see an acceleration in the rollout of the RM45 billion Mass Rapid Transit 3 (MRT3) project and six flood mitigation projects reportedly to be worth RM13 billion, assuming there is a market-friendly outcome of the state elections on Aug 12, said Kenanga Research.

The flood mitigation projects include Sungai Johor (Johor), the construction of the Sungai Klang-Sungai Rasau dual-function reservoir (Selangor) and the Sungai Golok Integrated River Basin Development Phase 3 (Kelantan).

In its Sector Update note, the research firm said this would also likely expedite the disbursement of the massive RM97 billion gross development expenditure as under Budget 2023, which is a 35 per cent increase year-on-year, versus RM71.6 billion a year ago.

That said, already Ahmad Zaki Resources Bhd secured a RM122.5 million project on road works in Cameron Highlands in early June.

Meanwhile, it said the private sector construction market is vibrant, underpinned by massive investments in new semiconductor foundries and data centres.

The shift was following multinational corporations diversifying their manufacturing base away from China to mitigate risks.

“These projects come with larger contract sizes ranging between RM1 billion and RM1.5 billion each, and a much shorter timeline versus conventional contracts – enabling contractors to command a premium.

“Notably, companies like Sunway Construction Group Bhd (SunCon) and Kerjaya Prospek Group Bhd have already benefitted from such contracts in calendar year 2022.

“Our top picks are Gamuda Bhd and SunCon as we believe they will extend their winning streaks for new jobs,” it said.

Overall, Kenanga Research is maintaining an ‘overweight’ call on the construction sector as the sector’s dynamics are favourable for earnings growth in 2023.

This is contributed namely by the the gradual return of foreign workers that would alleviate labour shortages, and the lower prices of base metals like steel and aluminium, along with other key building materials such as diesel and bitumen due to weaker oil prices, will reduce costs.

“Furthermore, most new contracts currently under negotiation will incorporate the latest higher prices and include provisions for price variation to protect margins in case of significant swings in material prices.

“As a result, the overall margins should gradually improve as older low-margin projects are phased out and replaced by new projects adjusted for higher input costs,” it added. – BK