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KUALA LUMPUR: A gradual improvement in contract flows in the construction sector is likely this year as the country moves towards the endemic phase from the Covid-19 pandemic stage.

Hong Leong Investment Bank Research (HLIB) said a recovery in private sector opportunities and ongoing rollouts of existing projects like the East Coast Rail Link, Pan Borneo Highway Sabah and Sarawak, Johor Baru-Singapore Rapid Transit System and Central Spine Road project will support job flows in 2022.

Additionally, there is also the potential rollout of the Sarawak Metro which costs about RM6bil.

Note that domestic contracts to listed contractors amounted to RM6.3bil in the fourth quarter (Q4) of last year, boosted by RM1.6bil worth of awards from water and solar projects, notably the Rasau Water Scheme (RM896mil) and the fourth cycle of Large Scale Solar projects (RM571mil).

Notable contract wins in Q4 of 2021 included package two and three of Rasau to Taliworks Corp Bhdl, the Sabah Sarawak Link Road package to Kimlun Corp Bhd (RM780mil) and the aerotrain project in the Kuala Lumpur International Airport to Pestech International Bhd (RM743mil).

Meanwhile, there was only one foreign contract awarded during the quarter which involved the upgrading of various substations in the Philippines to Pestech International Bhd for a contract sum of RM157mil.

“The Home Ownership Campaign (HOC) and low interest rates which lifted property sales in 2021, could see a ramp up in private sector contract awards considering the repeated award delays in 2021,” HLIB pointed out.

However, the downside to this is the dampening of sentiment from the expiry of the HOC, interest rate hikes and rollout delays due to high materials price.

On a year-to-date basis, contracts awarded in 2021 were higher by 63% largely due to the low base effect as 2020 saw lockdowns imposed in the country.

In 2021, HLIB noted that stronger water, affordable housing, solar and road projects such as public sector funded jobs were seen while private sector contracts remained flattish due to the continued restrictions which dented rollout optimism.

The research house has maintained its “neutral” call on the construction sector given the fluidity of the looming general election, which could weigh on sector sentiment with investors adopting a wait-and-see approach.

“Sector valuations are on the lower end at 12.9 times price-to-earnings ratio on the next 12 months earnings per share (five-year average) and 0.65 times price-to-book value (minus one standard deviation five-year range).

“Recent reports on critical projects, including the Mass Rail Transit line three, are encouraging but we remain cautious on the timeline and overall sector earnings execution amid the ongoing virus spread,” it added.

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