KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research is bullish on the construction sector in 2024 in anticipation of public project contract flows that could boost contract awards beyond current contract levels.
In a recent update, the research firm upgraded the construction sector to "overweight", with Gamuda Bhd
and Sunway Construction Bhd as its top picks.
According to HLIB, both companies have contract levels, apart from the Mass Rapid Transit 3 project, that could lead to a more sustained orderbook growth phase.
Based on Budget 2024, the government intends to roll out several big ticket projects like Pan Borneo Sabah Phase 1B (RM15.7bil), flood mitigation packages worth RM11.8bil, Penang LRT (RM10bil), Sabah-Sarawak Link Road (RM7.4bil) and LRT3 reinstatement (RM4.7bil).
HLIB noted that these projects form part of the 2024 budgeted development expenditure of RM90bil, a 7.9% increase year-on-year after stripping out the 1MDB bond.
"We also expect further developments on civil packages for the MRT3 (tender validity extended to Mar-24) while there is potential for more news flow from other prospective projects like KL-SG HSR and Johor LRT (RM20bil).
"Tangible developments for Special Economic Zone and Special Financial Zone in Johor could also generate more construction opportunities, in particular the former given its greenfield status."
HLIB also believes the recent appointment of the Minister of Finance II should start de-bottlenecking the pipeline, while ongoing subsidy rationalisation will have an incremental effect of lifting fiscal space as potential savings are repurposed for infrastructure projects over the longer term.
"We see 2024 as an opportune time to start building – factoring in implementation time lags, the full scale of economic multiplier effects to be felt before the next GE," it said.
Meanwhile, HLIB also expects a pick up in capex in the water space as tariff hikes are slated for next year.
"Recall that under the water sector transformation, the long term pipeline of PAAB’s infra capex depends on the ability of state water operators to service incremental lease payments, ultimately linking water tariffs to capex.
"One major project in this space is the critical Sg Perak Raw Water Transfer Scheme (SPRWTS) that could cost RM4-5bil."
HLIB said more clarity on the development timeline is expected in 2024.
In its previous form, the project entailed the construction of a 15km water tunnel that played into the strengths of Gamuda.
As for cost pressures, HLIB believes they have largely moderated with the exception of cement, whose average selling prices remain stagnant so far in 2023.
"The more stable and predictable costs trends have in our view, aided with private jobs rollout and signs are a majority of input costs could stay stable going forward.
"Though the upcoming fuel subsidy rationalisation could result in spill-over increase in costs, we believe this is manageable given that it will be implemented gradually," it said.
