Here Is Why Analysts Remain Bullish on the Construction Sector

Despite a pullback since April, given the subsequent optimistic expectations for infrastructure projects and data center demand, multiple investment banks, including RHB Investment Bank, Kenanga Research, and Hong Leong Investment Bank, have maintained a positive outlook on the industry.

The RM90 billion development expenditure in the 2024 budget is expected to advance various large-scale public infrastructure projects actively.

The MRT3 or Circle Line project will interconnect with existing MRT, LRT, monorail, and train lines through interchange stations in the Klang Valley. This project could potentially commence as early as the second half of 2024.

The Bayan Lepas Light Rail Transit (LRT) project is set to alleviate the chronic traffic congestion on Penang Island. This project is likely to be launched by mid-year, as Gamuda has been in discussions with the government to finalize the implementation model and is currently awaiting government approval.

The six flood mitigation projects include the Sungai Johor flood mitigation works in Johor, the construction of the dual-purpose Sungai Klang-Sungai Rasau reservoir in Selangor, the third phase of the comprehensive development of the Sungai Golok river basin in Kelantan, and the new Pan Borneo Highway project.

TENAGA has signed Electricity Supply Agreements with nine data centres, requiring a potential energy demand of 2,300MW. So far, nine data centers have been completed with a total energy demand of 635MW. Each of these semiconductor fabs and data centers has an investment range between RM1 billion to RM1.5 billion and tends to follow up rapidly, which means they can achieve better profit margins.

Gamuda indicated strong confidence in obtaining authorizations for two new data center projects. While the specific contract values remain undisclosed, RHB Investment Bank's research division estimates them to surpass 200 million ringgit. Gamuda favors data center construction because the sector emphasizes speed and quality, which is more advantageous for protecting margins.

In March, SunCon secured a contract worth RM747.8 million from a US multinational technology company to construct and complete a data center in Selangor. The project is scheduled to commence no later than the anticipated start date of May 15, 2024.

As the increased costs have been accounted for in newly signed contracts, profits in the construction industry may see a recovery. Additionally, including price escalation clauses in contracts to protect contractor profit margins has become increasingly common in the post-pandemic era. As low-margin old contracts gradually conclude, new contracts characterized by normalization and higher profit margins are starting to contribute to earnings for the construction industry.

Kenanga Research states that company profits are poised to climb as project execution speeds up and higher contract wins. It said the industry's earning power should improve significantly compared to the fourth quarter of 2023.

Despite a pullback in April, analysts remain optimistic about the industry's outlook. The potential upside for SUNCON is as high as 22%. Additionally, the expected upside for GAMUDA is also at 17%, and more than 90% of analysts have given a buy rating.