KUALA LUMPUR (March 26): Analysts have maintained an “overweight” rating on the construction sector owing to ongoing government projects such as the Sabah Pan Borneo Highway and flood mitigation works.

CIMB Securities Sdn Bhd (formerly known as KAF Equities Sdn Bhd) said that tender activities for Phase 1B of Sabah Pan Borneo Highway seem to be picking up with the award of several new contracts.

The Sabah Pan Borneo Highway Phase 1B portion — collectively worth RM15.7 billion — involves 20 work packages with about RM785 million per package, according to CIMB Securities.

“The four packages have been awarded on March 22, with physical works poised to start on April 1. As for the balance of 16 packages, the tender exercise should be wrapped up by this month [physical work by May],” CIMB Securities said in a note on Tuesday.

The stockbroking firm noted that 300 companies have applied for the Phase 1B tender, and it expects that it would take a few months to shortlist the candidates.

“There is a noticeable absence of listed construction proxies involved in the construction of Pan Borneo Sabah thus far — most, if not all of the appointed contractors for Phase 1A and the first four packages of Phase 1B are privately held entities. However, we expect the listed contractors to be at the forefront of the remaining bids, as the project’s funding mechanism becomes clearer,” it said.

In the meantime, CIMB Securities advises investors to focus on contractors with a good track record in Sabah and possess a strong balance sheet such as Gamuda Bhd, IJM Corp Bhd, WCT Holdings Bhd and Malaysian Resources Corp Bhd (MRCB).

Other contractors with exposure in Sabah (including the supply of pre-cast products) include Gabungan Aqrs Bhd, Gadang Holdings Bhd, Bina Puri Holdings Bhd, and TRC Synergy Bhd.

“From a risk perspective, we highlight that the project’s margins may be compressed amid stiff competition for the soon-to-be-awarded work packages under Phase 1B. On the contrary, we posit that it is still possible for some of the cost-competitive contractors to emerge as multiple winners when the tenders close,” it added.

On the other hand, RHB Investment Bank Bhd kept its “overweight” call on the construction sector on the back of the government’s RM11.8 billion flood mitigation projects across 33 high-priority projects.

“Flood mitigation projects remain a crucial aspect for the country’s infrastructure. This should benefit contractors with a track record in flood mitigation works,” RHB said in a note.

RHB, which top picks Gamuda, Kerjaya Prospek Group Bhd and Sunway Construction Group Bhd, noted that Varia Bhd and TRC Synergy Bhd have previously been awarded flood mitigation projects in Selangor.

Meanwhile, MRCB which is currently involved in the Muara Sungai Pahang Phase 3 flood mitigation project, has also been shortlisted for a flood mitigation job in Selangor.

“Aside from this, Kimlun Corp Bhd has expressed its intention to bid for flood mitigation projects, which will most likely be in Johor given the group’s prominence in the state,” it said.

The research house also sees the potential for Rohas Tecnic Bhd to land a flood mitigation project in the near future as it has been involved in the Semenyih Water Treatment Plant (WTP) intake project, while Naim Holdings Bhd stands out as the main beneficiary for flood mitigation jobs in Sarawak as it was involved in Phase 1 of the Kuching flood mitigation project.

Additionally, RHB expects that the rollout of flood mitigation projects could provide an additional impetus for the Bursa Malaysia Construction Index to move higher than what was seen in 2017.

"The Bursa Malaysia Construction Index is trading at a 15 times forward price-earnings (PE), above its 10-year mean of 12.7 times. Nevertheless, the index was trading near a PE of 16 times in 2017 during the construction upcycle," it said.