DARK clouds are hovering over Malaysia’s construction sector with contract flow data from the Construction Industry Development Board (CIDB) pointing to a likely slowdown in the value and number of projects awarded for the remaining part of 2022.
As of year-to-date (YTD) August, the total value of contracts awarded amounted to RM74 bil which if annualised, works out to RM111 bil or an implied 15% year-on-year (yoy) decline from 2021’s RM131 bil.
That the job flow data are showing signs of contract awards tapering off in 2H FY2022F further reinforces CGS-CIMB Research’s view of a muted 2H 2022 ahead of Budget 2023 and the 15th General Elections (GE15).
“Tenders for certain categories of government/private sector contracts which may have been temporarily delayed (due to the sharp rise in raw material costs and labour issues) are one of our key findings post-2Q FY2022F results season,” observed analyst Sharizan Rosely in a construction sector update.
CGS-CIMB Research expects the priority and project mix under Budget 2023’s development expenditure (DE) to focus on assisting and expediting ongoing infrastructure contracts that are still negatively impacted by the rise in material costs, labour shortage and higher labour costs despite the lifting of lockdowns and re-opening of the economy since 4Q CY2021.
“We therefore would not discount the inclusion of selected stimulus measures to assist smaller contractors,” opined the research house.
“For larger contractors, we believe new mega contract proposals beyond those that have been approved in the last six to 12 months are unlikely to be introduced in Budget 2023 given that the immediate focus (including financing priorities) is the implementation of the RM31 bil MRT3 (Mass Rapid Transit Line 3).”
All-in-all, CGS-CIMB Research reiterated its “neutral” call on the construction sector while continuing to advocate selective exposure to contractors. “Political/election uncertainties, rising material prices, labour shortage risks and the government’s cautious stance on rolling out mega projects are key overhang risks,” cautioned the research house.
In light of uncertainties in the roll-out of new larger-value contracts ahead of Budget 2023 as well as sustained sector headwinds pre-GE15, CGS-CIMB Research said it continues to prefer contractors with the following themes:
- 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 MRT3 civil works packages; and
- Strong overseas order pipeline.
“In the big-cap space, we continue to prefer Gamuda Bhd (top pick) and IJM Corp Bhd. In the small-cap space, HSS Engineers Bhd remains ours preferred pick,” added the research house. – Sept 12, 2022
