Affin Hwang remains overweight on construction


  • Analyst Reports
  • Monday, 18 Nov 2019

Affin Hwang Capital Research believes public-sector contract awards will pick up in 2020. East Coast Rail Link (ECRL) subcontracts to be awarded to Malaysian contractors will start in 1Q20.

KUALA LUMPUR: Affin Hwang Capital Research remains Overweight on construction and its top buys are AQRS, Gamuda, Sunway Construction and Pintaras.

It said on Monday public-sector civil works done by contractors are picking up, growing 3.4% year-on-year (yoy) to RM16.6bil in 3Q19. However, the LRT3 project works only resumed in 2H19 for some of the subcontractors.

“Hence, we expect aggregate construction earnings to rebound in 3Q19 from a low base in 3Q18 post-general election.

Affin Hwang Capital Research expected aggregate construction core earnings to see a recovery in 3Q19 with higher progress billings for ongoing projects.

There will also be the low base effect for yoy comparison as sector core earnings contracted 27% yoy in 3Q18 due to the stalling of some projects as the new government renegotiated the contracts to reduce cost.

The research house met with 13 investors from nine institutional fund management companies during our recent analyst marketing on the market, construction and Electronics Manufacturing Services (EMS) sector outlook.

Most were concerned about the political uncertainties on leadership succession, government policy risks on construction and concession contracts, and Gamuda’s ability to replenish its order book.

“We believe the government will maintain the sanctity of government contracts so as not to disrupt the capital markets.

“We believe public-sector contract awards will pick up in 2020. East Coast Rail Link (ECRL) subcontracts to be awarded to Malaysian contractors will start in 1Q20.

“More packages for the Pan Borneo Highway Sabah will also be rolled out. Other large-scale projects such as the Klang Valley MRT Line 3, Penang Transport Master Plan and KL-Singapore High Speed Rail (HSR) could see news flow on potential revival in 2020, ” Affin Hwang Capital Research said.


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