WHILE the rollout of mega projects will create a significant trickle-down effect to the economy, the government is likely to prioritise its spending so as to manage its coffers orderly while focusing its efforts to tackle the COVID-19 menace.
While this implies less activities within the construction sector, UOB Kay Hian Research expects approved mega projects like the East Coast Rail Link (ECRL), the Johor Bahru-Singapore Rapid Transit System (RTS) and the Pan Borneo Highway Sabah (PBHS) could still be implemented as financing for these projects has been approved.
“Our checks reveal that the engineering design contract for RTS will be announced in late-2020 and this will benefit engineering consultancy companies like HSS Engineers Bhd,” wrote analyst Farhan Ridzwan in a sector update.
“We like companies with lean operating structure that can weather the COVID-19 impact as well as frontrunners for approved projects.”
According to UOB Kay Hian Research, the construction sector’s earnings have dropped significantly in the second quarter of this year as contractors halted construction activities under the movement control order (MCO).
“Some contractors have opted to do ‘kitchen sinking’ exercise in 2Q2020 where a few have booked in impairment, particularly for completed property inventories,” noted Farhan.
Nevertheless, further checks by the research house also showed that most contractors have started to recognise stronger progress billings (80-90% of pre-MCO levels).
Such accelerated billings from the outstanding order book backlogs will drive stronger half-on-half earnings in 2H2020.
For now, however, the research house expects less excitement as fiscal constraint will force the government to relook at how to kickstart its new mega projects.
Further compounding the matter is the very fact that the government has a slim majority in the Parliament which complicates its plans to push through its national budget (i.e mega projects are usually budgeted in the national budget).
“(Nevertheless,) the Perikatan Nasional government may push and implement major fiscal policies (i.e mega project rollouts) should it be able to secure a stronger majority in the parliament via the upcoming snap general election,” reckoned UOB Kay Hian Research.
All-in, the research house retained its “market weight” on the construction sector with both Gabungan AQRS Bhd and Kerjaya Prospek Group Bhd being its top picks for ECRL contracts which are broken into small packages (and PBHS should it resume in 1H 2021) and high-rise residential project contracts respectively. – Oct 23, 2020
