Buoyant outlook for building sector

PETALING JAYA: RHB Research is maintaining its “overweight” call on the construction sector, highlighting resilient earnings and robust job flows, particularly from data centre (DC) developments and water infrastructure, alongside other infrastructure projects.

“Out of the 11 companies under our coverage that reported results between February and March (mostly for financial year 2024), five were in line, three exceeded expectations, and three missed,” it said, noting that even the underperformers – mainly small to mid-cap contractors – continued to show earnings growth.

The research house sees contractors continuing to book better progress billings, having recorded a total work value of RM42bil in the final quarter of 2024 – the highest on record.

On the DC front, RHB Research said despite market concerns about the artificial intelligence (AI) diffusion rule and the emergence of China’s DeepSeek, “DC developers have yet to show signs of slowing down.”

It noted that Chinese players such as GDS Holdings Ltd and Bridge Data Centres secured funding of US$3.4bil and US$2.8bil, respectively, for expansion in Malaysia and the wider Asia-Pacific region.

“More importantly, the requirement for water to operate DCs appears accommodative,” it said, adding that Johor plans to increase its treated water supply capacity to 3,061 million litres a day (MLD) from 2,171 MLD. “Based on our projections, this is more than enough to cater to the upcoming DC capacity in the state.”

Meanwhile, RHB Research believes that upcoming water infrastructure projects could be the “icing on the cake” for the construction sector.

It said the Sungai Perak to Bukit Merah Dam project, which is in the final planning stage, could provide job opportunities worth up to RM4bil, while Stage 2 of the Sungai Rasau Water Supply Scheme is expected to be valued at about RM2bil.

According to the research house, contractors like Gamuda Bhd, Taliworks Corp Bhd and IJM Corp Bhd have secured Stage 1 packages of the Sungai Rasau Water Supply Scheme via three contracts worth approximately RM3bil in total.

Additionally, it highlighted that Air Selangor plans to build another two new water treatment plants – Labohan Dagang Phase 2 and Langat 2 Phase 2 – by 2030.

RHB Research said large-scale transport projects are also on the radar, including the Penang LRT (estimated at RM13bil), Johor Baru’s Elevated Autonomous Rapid Transit system (estimated at RM6bil) and Selangor’s proposed Kita Selangor Rail Line.

According to CIMB Securities Research, the Penang International Airport (PIA) expansion is progressing steadily, with tenders for the main terminal building – the largest portion of the project – expected to open by May 2025.

The research house said construction works for the first two of three packages are already underway.

Package 1, valued at RM108mil and awarded to Gagasan Maya Sdn Bhd, reached 31% completion as of mid-February.

Physical works for Package 2, worth RM255mil, will begin in April and have been awarded to Acre Works.

CIMB Research estimated that the upcoming Package 3 may be worth up to RM1.2bil.

The tender encompasses the construction of a new terminal and renovation works for the existing terminal building.

The research house believes Gamuda is a strong contender for this contract due to its “proven track record in airport-related infrastructure works” and its logistical edge over rivals, thanks to its involvement in the ongoing reclamation work for Silicon Island near PIA.

CIMB Research also identified other “eligible” bidders, including IJM Corp and Malaysian Resources Corp Bhd, both of which have expressed interest.

It also flagged Ann Joo Resources Bhd as a likely downstream beneficiary, citing its steelmaking facility in Seberang Prai.

Overall, RHB Research said the Construction Index is currently trading at about a 14 times price-to-earnings (PE) ratio, near its 10-year mean of 13 times.

“This index was trading around the 18 to 19 times PE range in late 2024, before concerns over the AI diffusion rule and DeepSeek came about – which led to the DC premium experienced by the sector to be diminished,” it said.

“Notwithstanding this, the prospects from the DC space remain vibrant in Malaysia, in our view – hence, the sector should be trading at a higher level than where it is now.”