"We think the sector’s appeal to investors will gradually increase as we approach Budget-2021 (on 6th Nov 2020) and 12th Malaysian Plan (Jan 2021) in anticipation of the potential roll-out of mega infrastructure projects namely MRT3, Pan Borneo Sabah, Sabah Sarawak Link Road and potentially HSR.
"During this time, we do not discount the possibility for the KLCON Index to re-rate to 17x PER (or +2SD above mean) and hit 230, providing 47% upside from current levels," it said, while maintaining its "overweight" call on the sector.
It added that there are lingering concerns over a snap general election and the government's limited fiscal strength, although the situation is not as bad as feared.
"In terms of a snap election, we are of the view that should it be held, this would mean that the existing coalition is confident of winning.
"Counter-intuitively, a snap election in this manner could actually be good for the construction sector as political stability would be achieved," it said.
It also believes there is more capacity for government funding that what consensus expects.
It cited more dividends from Petronas, a monetisation of Petronas through a private stake sale to GLCs, more dividends from Khazanah through asset/equity sales and increasing the debt-to-GDP ceiling to 65% as potential sources of funds.
Kenanga's channel checks also revealed growing sentiment on the ground with contractors more optimistic over more job roll-outs.
It said contractors within its coverage have indicated that operating levels have recovered to 60% to 100% as compared to 20% to 40% during the MCO and CMCO.
It said contracts sums awarded to KLCON contractors are still encouraging with a total contract value of RM9.8bil, 8.4% lower year-on-year.
"While FY20 is likely to end the year on a weak note (i.e. weakest in 5 years since 2014), our view is that FY21 contract awards will rebound and continue to grow for the subsequent years underpinned by growth projects such as MRT3, Sabah Sarawak Link Road, Pan Borneo Sabah, RTS, Bandar Malaysia and possibly HSR," it said.
Kenanga's top picks for the sector are Gamuda, SunCon, Kimlun and Kerjaya.