PETALING JAYA: The contract flows within the construction sector is expected to experience sluggish pace as it enters the third quarter of 2023 (3Q23), says Hong Leong Investment Bank (HLIB) Research.
This is owing to the delayed approval of development expenditure-funded projects within the revised Budget 2023 and upcoming state elections slated in mid-August, it added.
However, HLIB Research said there are swing factors in the second half of this year (2H23), primarily driven by Mass Rapid Transit 3 (MRT3) projects, and to a lesser extent, the airport expansion initiatives and the rollout of flood mitigation measures.
“Considering the Penang Light Rail Transit (LRT) does not yet have a fixed alignment nor financing arrangement, we expect material developments in 2024.
“As for opportunities in Sabah and Sarawak, flows are typically patchy for listed companies (low number of listed players),” the brokerage said in a report on the sector.
HLIB Research said that after starting 1Q23 on a strong note, registering RM7.2bil worth of contract awards, 2Q23 awards came in at about RM7.5bil.
While the contract awards in 1Q23 were driven by a surge following the 15th General Election in 4Q22 as awards were held back, the brokerage said the boost in contract awards in 2Q23 was attributed to Gamuda Bhd
’s reclamation letter of award worth RM3.5bil.
“Stripping this off, moderation is steeper coming in at RM4bil, a decrease of about 44% quarter-on-quarter. We attribute this to normalisation and slowdown ahead of state polls,” it noted.
On MRT3, HLIB Research expects the contract awards to take place by end-2023 or early 2024, from its initial expectations of mid-2023, due to the further extension of the tender period.
“The tender validity period has been further extended to Sept 30 from the end of June. This marks the second of such extensions for the project.
“Validity period was originally set to expire by the end of March before the first extension,” the brokerage said.
Given such delays, HLIB Research anticipates earnings impact could be negligible until late 2024, at the earliest.
Moreover, it believes the MRT3 project is apolitical and noted that the new government views the project positively.
“Assuming a six-year construction schedule, post-completion of LRT3 in 2024, Klang Valley may not have additional urban railway lines (radial or circle) until 2030, amid a period of potential fuel subsidy rationalisation,” it said.
HLIB Research also maintained its “neutral” rating on the construction sector, saying it prefers to take a long-term view.
It expects sector performance to peak on MRT3 flows as it does not foresee award-ready mega projects in the near-term pipeline aside from the aforementioned.
“With the market generally positioned for the long-awaited MRT3 catalyst, we anticipate possible sector correction once this is digested,” HLIB Research said.
The research house named Gamuda and Sunway Construction Group Bhd as its top picks within the sector.
It also said both companies have contract levers aside from the MRT3 project that could lead to a more sustained order book growth phase.
