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HLIB Picks Gamuda, IJM As Benefactors From A Sector Robust In 2H
Hong Leong Investment Bank Bhd (HLIB) is maintaining its OVERWEIGHT call on the construction sector, citing a promising second half anchored by data centres (DCs), infrastructure rollouts and continued private sector demand. Gamuda and IJM remain the research house's top picks with BUY ratings and target prices of RM5.50 and RM2.96, respectively, supported by robust balance sheets and strong orderbook prospects.
The KLCON Index managed to outperform the broader FBM KLCI by 3.6% in a volatile first half, despite multiple negative events. The sector saw a sharp recovery of 29% from April lows, attributed to rescinded GPU restrictions, reaffirmed capex from Big Tech, healthy contract flows and solid 1Q earnings. Gamuda and Sunway Construction delivered 1H gains of 1.1% and 29.6% respectively, outperforming the broader sector.
Year-to-date (YTD), total contract awards reached RM28.9 billion, representing a 39.5% year-on-year growth. Notable contracts include the RM8.3 billion Penang LRT Segment 1 to the SRS Consortium (60% Gamuda), RM2.94 billion KSSC redevelopment to MRCB and the RM2.47 billion variation order for LRT3, also to MRCB. However, DC-related contracts in 1H fell 31% year-on-year to RM3.3 billion, which HLIB attributes to timing factors as several large-scale hyperscale tenders were only recently called.
Looking into 2H25, HLIB expects a surge in DC awards, including five multibillion-ringgit tenders from a US-based hyperscaler. Larger contractors such as Gamuda, IJM and SunCon are anticipated to benefit most, leveraging their financial strength, execution track records and integrated value chain offerings. The firm remains cautious on potential AI chip export restrictions affecting Malaysia but believes such risks are partially mitigated by the sector's dependency on Western hyperscalers, with exemptions likely to be granted.
On the impact of the reimposed 6% SST on construction, HLIB notes that most non-residential projects are protected by contract clauses that allow for cost pass-throughs. Government and residential projects remain exempt, narrowing the range of exposure. For DC projects specifically, the firm believes the impact will be muted due to contract structures like FIDIC and sustained demand despite cost pressures.
SunCon's target price has been revised upward to RM6.70 (from RM5.93), following higher replenishment assumptions in FY25–27. HLIB now expects FY25 contract wins to hit RM7.3 billion, factoring in SunCon's growing edge in hyperscale DC execution, including ahead-of-schedule completions for projects like K2 and Yellowwood.
Despite possible sector headwinds from the AI chip issue, slower property markets and subsidy rationalisation, HLIB sees room for further rerating, with forward valuations still attractive at 19.1x P/E and 1.3x P/B. Related
