KUALA LUMPUR (Dec 20): Hong Leong Investment Bank (HLIB) Bhd has upgraded the construction sector to “overweight” (from “neutral”) as the research house expects public project contract flows to boost contract awards beyond the current level of about RM20 billion.

In a note on Wednesday, the research house highlighted that infrastructure project rollouts fell below expectations in 2023, as anticipated ones failed to materialise in part due to re-tabling of Budget 2023 and mid-year state elections.

Despite this, HLIB believes that the recent appointment of Datuk Seri Amir Hamzah as finance minister II is poised to alleviate project pipeline bottlenecks. Additionally, the ongoing subsidy rationalisation is expected to incrementally enhance fiscal space as potential savings are redirected towards long-term infrastructure projects.

“...We are expecting a debottlenecking of [the] public project pipeline while private jobs should sustain. Amidst this prospect of an extended contract recovery upcycle, sector valuations are still undemanding trading at P/E & P/B multiples of 12.7x and 0.7x respectively,” said HLIB.

Based on the Budget 2024 announcement, the  government intends to roll out several big ticket projects such as Pan Borneo Sabah Phase 1B with a value of RM15.7 billion, flood mitigation packages worth RM11.8 billion, Penang LRT (RM10 billion), Sabah-Sarawak Link Road (RM7.4 billion) and reinstatement of LRT3 (RM4.7 billion).

“We also expect further developments on civil packages for the MRT3 (tender validity extended to March-24) while there is potential for more news flow from other prospective projects like KL-SG HSR and Johor LRT (RM20 billion). Tangible developments for [the] Special Economic Zone and Special Financial Zone in Johor could also generate more construction opportunities, in particular the former given its greenfield status,” said HLIB.

“…. We see 2024 as an opportune time to start building — factoring in implementation time lags, the full scale of economic multiplier effects will be felt before the next GE [general election],” it added.

The research house said Gamuda Bhd and Sunway Construction Group Bhd (SunCon) remain its top picks as both have contract levers besides the MRT3 project that could lead to a more sustainable growth phase in the order book. It assigned “buy” calls for Gamuda and SunCon with target prices of RM5.15 (Gamuda) and RM2.16 (SunCon).

Gamuda, which has risen over 21% year-to-date, was traded unchanged at RM4.61 on Wednesday. At this price, the group is valued at RM12.53 billion.

SunCon’s share price has increased over 23% since the start of the year. It closed at RM1.96 on Tuesday, with a market capitalisation of RM2.53 billion.