KUALA LUMPUR (April 26): CIMB Investment Bank (CIMB IB) Research has upgraded the construction sector to neutral from underweight previously on signs of a recovery in pump-priming, driven by China-Malaysia projects such as the RM44 billion East Coast Rail Link (ECRL) and RM140 billion Bandar Malaysia.

"We upgrade the construction sector from Underweight to Neutral, upside risk is the revival of the HSR (high-speed rail) and potential review of the Mass Rapid Transit (MRT) 3 project," said analyst Sharizan Rosely.

"We advocate a switch to sector laggards, being Muhibbah Engineering [(M) Bhd] and WCT [Holdings Bhd] for potential rail exposure. At current share price levels, we are neutral on the bigger caps pending the rollout of new tenders.

"From the slump in mega projects post-GE14 May 2018, there appear to be signs of pump-priming making a gradual comeback, with more private sector-driven initiatives given the limited scope for direct government funding," he said.

He added that more announcements about tenders are expected from the second half of this year onwards.

The potential pipeline projects in CIMB IB's revised list are valued at RM140 billion, excluding the 121 projects worth RM13.9 billion which are expected to proceed following cost negotiations with the government.

Sharizan is positive on the Bandar Malaysia project in the long term, but noted major spillover effects on local rail contractors are dependent on the review of the Kuala Lumpur-Singapore HSR project, due in May 2020.

Share prices for the construction sector have been re-rated 49% on year-to-date average, and recent announcements on both Bandar Malaysia and ECRL have been priced in.

"If the HSR is revived, we think that domestic rail contractor participation is likely to be prioritised, akin to the ECRL," he said.

In the medium term, rail contractors should benefit from the 40% local content requirement for the ECRL project, which amounts to RM17.6 billion worth of works.

However, he noted a mitigating factor for contractors would be potentially unprofitable subcontracting margins, despite contract values potentially being sizeable.