PETALING JAYA: The construction sector is expected to see a steadier trajectory in 2026, underpinned by resilient contract flows and a potential pickup in activity in the second half of the year (2H26), according to Hong Leong Investment Bank (HLIB) Research.
It maintained its “overweight” call on the sector.
In a note to clients yesterday, the research house said it anticipates “full year contract flows for 2026 to still remain broadly steady in comparison to 2024 to 2025’s run-rate despite a potential near-term blip,” driven by catalysts such as data centre (DC) rollouts, water infrastructure projects and rail-related packages.
It added that the anticipated rebound in 2H26 will likely be driven by the finalisation of several DC tenders and greater clarity in the timeline surrounding the rollout of large-scale infrastructure projects.
HLIB Research reported that domestic contract awards reached RM10.8bil in the first quarter of financial year 2026 (1Q26), up 13% quarter-on-quarter but down 34% year-on-year due to the absence of large infrastructure projects seen a year earlier.
“Despite relatively muted infra job flows... we reckon this marks a decent start to the year,” it pointed out.
Ït also noted that commercial and residential projects were a key contributor, accounting for RM4.9bil or nearly half of total awards.
The DC segment also remained a significant growth area, contributing RM2.6bil in contracts, supported by core and shell works as well as electrical and substation packages.
Among notable wins during the quarter were Sunway Construction Group Bhd
’s RM1.2bil contract from a US multinational and multiple projects secured by Binastra Corp Bhd.
However, near-term risks persist, with HLIB Research cautioning that residential job flows may soften in the second quarter as developers and contractors adopt a more cautious stance.
“We think the current ‘wait-and-see’ approach by both developers and builders will result in a softening residential job flow in the coming quarter,” it added.
Cost pressures are another area of concern, particularly following the recent surge in commodity prices linked to geopolitical tensions.
“The surge in commodity prices driven by the blockade of the Strait of Hormuz is likely to exert increasing cost pressures on the construction sector,” it said, citing higher diesel costs and potential knock-on effects on materials such as cement and steel.
That said, the impact is expected to be manageable.
“We anticipate margin pressures to remain manageable, with only a slight dent on a full-year basis,” it added, pointing to improved contract structures such as cost-plus arrangements that help mitigate cost volatility.
HLIB Research noted that valuations are turning more palatable, on an improving risk-reward profile, while selecting Gamuda Bhd and Kimlun Corp Bhd as its top picks, with respective target prices of RM5.60 and RM2.01.
Meanwhile, an analyst with a foreign research house told StarBiz that while the 2H26 sector rebound is plausible, it is not guaranteed, as it hinges more on execution timing than project availability.
Acknowledging that the construction pipeline itself looks reasonably intact and noting that DCs are the clearest near-term driver, she said water infrastructure is the next most credible contributor, especially with large schemes like Sungai Rasau Phase 2 and Langat 2 Phase 2 nearing formalisation.
“These are typically policy-driven and less cyclical,” said the analyst.
She believes that margins will probably come under mild pressure, but not to the extent seen in past cycles such as during the Covid-19 lockdowns.
“The key difference now is structural–contractors are more disciplined in bidding and increasingly incorporating risk buffers,” said the analyst.
“That said, smaller contractors or those with fixed-price legacy jobs are more exposed, particularly if energy-driven cost inflation persists longer than expected.”
