MALAYSIA’S construction sector is facing several headwinds in 2H 2022F with the Government mulling to shelve new mega projects in view of the sizeable RM77 bil subsidy bill being an overhang risk.
Such move as stated by Minister in the Prime Minister’s Department (Economic Affairs) Datuk Seri Mustapa Mohamed could trigger a delay risk for projects in the pipeline for 2H 2022F, according to CGS-CIMB Research.
“If this decision goes through and if the 15th General Election (GE15) occurs in 4Q 2022F/1Q 2023F, there is a likelihood that the typical pre-election theme of contract roll-out may not materialise in the lead-up to polling,” cautioned analyst Sharizan Rosely in a construction sector update.
“Under this scenario of a weak contract newsflow period, there could be limited trading opportunities on some construction stocks as investor sentiments and expectations may be subdued.”
On the same note, CGS-CIMB Research is also wary about the negative impact of rising building material prices.
“Margin compression risks are company-specific and higher for small- to medium-sized contractors/property developers (with limited variation of price [VOP] advantage with its clients),” observed the research house.
“Meanwhile, we believe larger contractors that have a bigger proportion of order book with escalation clauses are more insulated.”
Interestingly, CGS-CIMB Research said labour shortage, higher labour costs and higher minimum wages of RM1,500/month are not viewed as material risks by contractors under its radar and remain manageable.
“Tender plans and timeline for the Mass Rapid Transit Line 3 (MRT3) project – the sole bright spot in 2H 2022 – are intact and should reflect the prevailing costs with the two-year PFI (private finance initiative) funding will kick off in CY2023F,” noted the research house.
Given the latest development, CGS-CIMB Research reiterated its “neutral” outlook on the construction sector by preferring the following plays:
- Asset divestment via highway asset sales;
- Stronger balance sheet positions with special dividends in the pipeline;
- Improving order book growth outlook;
- Advantage in clinching tier-1 MRT 3 civil works packages; and
- Strong overseas order pipeline.
“Political/election uncertainties, rising material prices, and the Government’s reverting to a cautious stance on mega project rollout are overhang risks,” reckoned the research house.
“Our preferred large-cap names are Gamuda Bhd and IJM Corp Bhd given potential catalysts from MRT3 awards in 4Q 2022F/1Q 2023F while in the small-cap space, we like HSS Engineers Bhd given rising demand for engineering and project management services (EPMS) and potentially clinching larger value scopes from MRT3.” – July 21, 2022
