Malaysia's Construction Sector Q3 Forecast Exceeds Q2 Growth Rate: What's Next?

Moomoo News MY wrote a column · Oct 25 04:24

According to Department of Statistics Malaysia (DOSM), Malaysia's GDP for the third quarter of 2024 (3Q24) is estimated to grow by 5.3%, down from 5.9% in the previous quarter, with the construction sector expected to see a growth rate of up to19.5%.

In the second quarter of 2024, construction activity in Malaysia grew by 20.2% YOY, up from 14.2% in the first quarter, marking the ninth consecutive period of growth.

Also, according to the Malaysian Construction Industry Development Board (CIDB), the total value of construction projects awarded from January 1 to September 30 this year reached RM150.2 billion, encompassing 11,980 projects. In comparison, 2023 saw 10,990 projects valued at RM115.3 billion. The government continues to play a crucial role, investing RM41.4 billion in 3,998 projects.

Malaysia's Construction Sector Q3 Forecast Exceeds Q2 Growth Rate: What's Next?

Investors are closely monitoring the remarkable growth of the construction sector this year and its underlying reasons.

1. According to CIDB, the recovery of the construction industry is driven by multiple factors, including post-pandemic economic recovery, increased foreign direct investment (FDI), and strategic infrastructure development.

There has been a significant rebound in economic activity, likely fueled by pent-up demand for new development projects and the resumption of projects that were paused during the crisis.

Government efforts to improve economic policies and create a more favorable business environment have attracted substantial foreign investment, particularly in sectors such as infrastructure and industrial development.

CIDB notes that initiatives like China's Belt and Road Initiative are expected to continue supporting Malaysia's infrastructure development.

2. Anwar highlighted that the rapid growth of the construction sector is also driven by soaring demand for data centers, propelled by advancements in digital technologies such as big data and artificial intelligence. Kenanga Research believes that data centers are leading the growth of private projects, with major tech giants like Amazon, Google, and Microsoft, along with other data center operators, investing in Malaysia, creating approximately 7,200 MW of data center opportunities.

The table below outlines the construction contracts related to data centers over the past year, including developer, contractor, location, value, and estimated completion time.

3. From the perspective of the Budget 2025, despite a reduction in development spending, the construction sector remains favored by the market: the government has allocated RM2.8 billion for the maintenance of federal roads and RM5.5 billion for the MARRIS fund for national roads. Additionally, 12 flood mitigation projects valued at RM3 billion have been approved and are progressing as scheduled. MIDF Research believes that the construction sector is a key beneficiary of the 2025 budget, with preferred stocks including $IJM (3336.MY)$, $GAMUDA (5398.MY)$, and $MCEMENT (3794.MY)$.

What Lies Ahead for the Construction Sector?

According to the Construction Industry Development Board (CIDB), the construction industry is set to undergo a significant transformation with the increasing integration of technologies such as artificial intelligence (AI), machine learning, and robotics.

CIDB expects strong contract flows in the short term, projecting that total contract awards may exceed the peak levels of 2016 by 2025, with opportunities for 7,200 MW of data centers by 2035.

Several institutions are bullish on the sector:
Kenanga maintains an "Overweight" rating for the industry, with $GAMUDA (5398.MY)$ identified as a top pick due to its leading position in multiple data engineering projects and strong earnings visibility, boasting a record RM26.5 billion in uncompleted orders. Mid-cap contractors $KERJAYA (7161.MY)$, $KIMLUN (5171.MY)$, and $WCT (9679.MY)$ also retain their "Outperform" ratings.

HLIB shares a positive outlook for the sector's performance in 2H24, anticipating the rollout of significant infrastructure contracts, with total contract awards expected to reach RM400 billion. Their preferred picks remain $GAMUDA (5398.MY)$ and $SUNCON (5263.MY)$.

JP Morgan also holds an "Overweight" rating for the sector, suggesting that the potential benefits from data center and public infrastructure contract awards have not yet been fully reflected in prices. However, JP Morgan identifies several potential risks ahead, including: 1) regulatory and policy uncertainties; 2) intense competition and profit pressure; 3) project execution delays; 4) financing and cash flow constraints.

In late November, key players in the Malaysian construction sector will report their Q3 performance and operational status.

According to Bloomberg forecasts, SUNCON and Sunway are expected to release their financial results on November 21 and 22, 2024, respectively, while IJM is anticipated to announce results on November 27. Gamuda is expected to disclose its Q3 performance on December 6.

Source: CIDB, Kenanga, HLIB, JP Morgan, Bloomberg

Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more