• Top Picks: Sunway Construction and Kerjaya Prospek. Prime Minister Dato’ Seri Anwar Ibrahim said Budget 2023 will be revamped from many aspects, and that it would be given a new foundation while still incorporating suggestions from the previous version. Hence, we think this revamped budget could either see a downwards revision or reallocation of the previously budgeted MYR95bn (2022F: MYR71.8bn) development expenditure. Consequently, we prefer contractors with limited exposure to government-related projects. Maintain sector NEUTRAL.

• Borneo could see a higher revised allocation. We believe the sizeable presence of the Borneo block in this unity government will likely have positive implications in terms of higher revised development expenditures for Sarawak and Sabah – East Malaysia saw an allocation of MYR5.4bn (2022: MYR4.6bn) and MYR6.3bn (2022: MYR5.2bn) in the initial Budget 2023 tabled in Oct 2022. So far, as of 20 Jan, the Government has given preliminary approval for an additional allocation of MYR1bn to upgrade Sabah and Sarawak’s border infrastructure. Notwithstanding this, we believe the bulk of the allocation may flow towards smaller-sized contractors that are not publicly listed.

• Recap of project flows in 2022. The total value of projects awarded in 2022 stood at MYR134.5m (+1% YoY) while the number of projects awarded dropped 16.5% YoY to reach 11,163 projects (2021: 13,361 projects). On further scrutiny, the value of government projects was 15% YoY lower at MYR37.4m for 2022 while the value of private projects was 9% YoY higher at MYR97.1m. This indicates a sluggish roll-out of government-related jobs that usually include infrastructure works. As at 24 Jan, MYR1.2bn worth of private projects have been were awarded so far in 2023 vs only MYR200m of government projects during the same period.

• Medium-term strategy. Considering the risks surrounding public infrastructure projects, we retain our NEUTRAL stance on the sector but advocate investors to focus on contractors that have ventured into new types of jobs, eg data centres and industrials. Industrial properties are expected to record better growth – especially with China’s reopening – that could likely attract more foreign direct investments (FDIs) into the country.

• Top Picks. We think contractors like Kerjaya Prospek and Sunway Construction fit the criteria of the above-mentioned strategy and, hence, identify them as sector Top Picks. For Kerjaya Prospek, the reason being is its framework arrangement with Samsung C&T that enables it to secure more industrial jobs. This is backed by its net cash pile. Sunway Construction is favoured for its aim to venture into local data centre construction jobs – these are usually dominated by private foreign contractors like Takenaka Corp. Key risks associated with the construction of data centres include: i) Potential labour shortage that may lead to extension times for data centre projects (which have shorter timelines) and ii) intensified competition from other contractors.

Source: RHB Research - 27 Jan 2023