PETALING JAYA: “The best is yet to come,” notes Kenanga Research on the construction sector, owing to the anticipated roll-out of mega public infrastructure projects and the sector’s promising margin recovery.
The research house said it believes the government now has more fiscal space to roll out such projects, having started fuel subsidy rationalisation with the removal of the diesel subsidy from June 10.
Despite the year-to-date outperformance, largely fuelled by the RM10bil Mutiara Line of the Penang Light Rail Transit (LRT) project and various data centre projects, Kenanga Research said the outlook remains positive with the forthcoming roll-out of the Mass Rapid Transit Line 3 (MRT3) project in the Klang Valley, which is estimated to cost about RM45bil.
“We maintain our overweight rating on the construction sector on the back of the roll-out of mega public infrastructure projects led by MRT3,” the research house said in a report on the sector.
Moreover, Kenanga Research noted that the sector has enjoyed a robust flow of private-sector jobs, especially for construction of data centres.
Notable projects include Gamuda Bhd
securing a RM1.74bil data centre job in Elmina Business Park, Selangor, in May 2024, while Sunway Construction Group Bhd (SunCon) clinched a RM748mil data centre job in Cyberjaya in March 2024 and an additional RM1.5bil data centre project for Yellowwood in Johor in June 2024.
“We believe there will be more with Microsoft embarking on its data centre project in Johor, having committed to investing US$2.2bil for cloud computing and artificial intelligence infrastructure in Malaysia. Similarly, Google has committed to invest US$2bil in developing its first data centre and cloud region in Malaysia,” the research house added.
Additionally, Kenanga Research highlighted the industry’s potential for margin recovery as newly secured contracts account for cost inflation since, post-pandemic, contracts commonly include price escalation clauses to protect contractor margins.
“We expect industry margins to improve further from here as older contracts with low margins tail off and new contracts with normalised and higher margins start to contribute,” the research house said.
Reflecting the improved prospects of the sector, Kenanga Research revised the valuation for large-cap builders to 20 times forward price-earnings ratio (PER).
Consequently, target prices for major players have been adjusted, with Gamuda to RM7.29 from RM6.70, IJM Corp Bhd to RM3 from RM2.77, and SunCon to RM4.28 from RM3.85.
“The expansion in our benchmark multiple is premised upon the improved prospects for the roll-out of mega public infrastructure projects following the fuel subsidy rationalisation,” it said.
Mid-cap companies, such as Kerjaya Prospek Group Bhd, saw their valuations revised to 16 times and 12 times forward PER, respectively, while small-cap players such as WCT Holdings Bhd and Kimlun Corp Bhd were revised to 12 times from 10 times, respectively.
The research firm increased its target price on Kerjaya Prospek to RM2.16 from RM1.90 and Kimlun to RM1.76 from RM1.47.
Kenanga Research maintained its “overweight” call on the sector, with Gamuda as its top pick.
