Maintain “overweight”: To better gauge the momentum of construction job flows, we tracked the contracts awarded to listed contractors based on their respective announcements made on Bursa Malaysia.
In the fourth quarter of 2014 (4Q14), domestic contract awards posted a strong showing at RM9.7 billion. This is an increase of 100% year-on-year (y-o-y) and an increase of 296% quarter on quarter (q-o-q) due to various sizable contracts such as the West Coast Expressway (WCE) (RM2.8 billion), Sg Langat sewerage plant (RM1.5 billion) which also includes a RM470 million subcontract, Ikano Mall (RM652 million) and Balingan power plant (RM493 million).
December 2014 saw exceptionally strong job flows at RM5 billion.
This made up 52% of the domestic contracts in 4Q14 and 28% for the full year. This sudden pickup was possibly due to the expediting of awards before the year-end.
For the full year 2014, domestic contracts totalled RM17.9 billion (an increase of 16% y-o-y). Excluding 2012, which had an exceptional boost from the mass rapid transit (MRT), 2014 posted the highest number of job awards since 2009.
We expect domestic contract awards to moderate to RM15 billion this year before picking up once again in 2016 when the MRT Line 2 kicks off. Key projects for 2015 include Warisan Merdeka (RM3 billion), light rail transit (LRT) 3 (RM9 billion), WCE open tender portion (RM2 billion), Sungai Besi-Ulu Kelang Expressway (Suke) (RM4 billion), Damansara-Shah Alam Highway (Dash) (RM4 billion), Kuantan Port extension (RM1 billion) and civil works for Kwasa Damansara (RM1 billion).
Foreign contract awards for 2014 stood at RM2 billion, increasing 71% y-o-y and contributing 10% to overall contract awards. The flow of foreign contracts tends to be very volatile.
The weak crude oil price environment has raised concerns that development expenditure may be cut (originally projected at an increase of 15% y-o-y).
The downside to this is largely mitigated via savings from the removal of fuel subsidies.
The impact of a development expenditure cut on mega projects should also be minimal as they are mostly carried “off balance sheet”.
Our data on contract awards indicate that job flows remain robust.
We retain our “overweight” rating premised on the surge in development expenditure for 2015, the rollout of new mega projects and unveiling of the 11th Malaysia Plan in May.
Gamuda Bhd (“buy”, target price [TP]: RM5.67) is our top pick among the large-cap contractors. The rollout of MRT Line 2, news flow on the Penang transport master plan and resolution to the Selangor water saga are key catalysts.
For the small caps, we like Mitrajaya Holdings Bhd (“buy”, TP: RM1.52) which sits on a strong order book cover of seven times coupled with growing property contribution.
The market has also overlooked the value of its land bank. — Hong Leong Investment Bank Bhd, Jan 7
This article first appeared in The Edge Financial Daily, on January 8, 2015.