Data centres continue to be key growth driver
PETALING JAYA: The construction sector appears to be on a growth trajectory and share prices are catching up, according to Hong Leong Investment Bank (HLIB) Research.
The key drivers of the growth story came from data centres (DCs) and public sector related jobs such as roads, railways and water, said the research house.
'The robust figure in the first half of the year reinforces the growth path for contracts in 2025, extending the order book expansion trajectory.
'In our view, with the sizeable data centre tenders set for awards in the second half, there is potential to match decade high flows last achieved in 2016,' it said.
'Domestic contract awards in the second quarter of the year came in at RM11.2bil, bringing the total sum in the first half to RM27.5bil, increasing by 33%.
'This is the fifth consecutive quarter of double digit contract value awarded,' HLIB Research added, noting that order books are poised to expand.
The research house noted this being the fifth consecutive quarter of double digit contract value awarded which had expanded in the billions.
'In our view, with sizeable DC tenders set for awards in the second half, there is potential to match decade high flows last achieved in 2016,' it said.
'We are foreseeing a DC award cycle in the second half, to be driven by multiple award decisions for DC tenders placed in the first half of this year – this includes multiple multi-billion ringgit tenders for one US based hyperscaler,' it added.
In the DC segment, HLIB Research noted that bigger projects are better for companies such as Gamuda Bhd , Sunway Construction Group Bhd and IJM Corp Bhd , given their competitive advantages such as balance sheet strength, track record and integrated structure.
'While news of potential artificial intelligence chip curb is concerning, in our view, Malaysian contractors are reliant on US and or Western-based hyperscaler names for sizeable DC jobs, thus mitigating uncertainties to a certain extent, in our view.
'DCs aside, the second half could see more action coming from the New Pantai Expressway extension, Penang Light Rail Transit (subcontracts and systems package) while sizeable road projects in Sabah and Sarawak may materialise,' it said.
'As for the commercial segment (including residential projects sitting on commercial plots), lack of clarity on sales and services tax treatment could weigh on the pipeline in the third quarter of the year,' HLIB Research added.
The research house had an 'overweight' rating with its top pick being Gamuda – a 'buy' with a target price of RM5.70.
It said contractors in the sector could broadly add to their order book from the DC segment as well as from infrastructure projects, while valuations at current levels provide room for upside.
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