Few precautions to construction sector optimism

IT is perhaps wiser not to take the future of the construction industry for granted pending more clarity from the Government in the form of actionable such as approval targets, timeline and execution strategies.

This rhymes with the “neutral” stance by CGS-CIMB Research on the construction sector even as the Budget 2021 spot light was shone on the Klang Valley Mass Rapid Transit 3 (KVMRT 3) and the Kuala Lumpur -Singapore High-Speed Rail (HSR) projects.

“We believe sentiment on selected rail stocks will be elevated, although we note that KVMRT 3 and HSR remain status quo and pending official approvals,” wrote analyst Sharizan Rosely.

Elaborating further on both rail projects, Sharizan said there were two positive indications, namely (i) the KVMRT 3 was mentioned as a project that will proceed, and (ii) the Government said it intended to proceed with the HSR project.

“We are encouraged by the stance on KVMRT 3 but believe that more actionable details in terms of timeline targets and potential revised cost may be laid out in the upcoming medium-to-long-term Economic Recovery Plan (ERP) in December or the tabling of the 12th Malaysia Plan (12MP) in January 2021,” opined Sharizan.

“For HSR, the final decision is still pending the end-December review deadline; (nevertheless) we remain optimistic about the outcome.”

On the overall, CGS-CIMB is slightly positive on Budget 2021’s allocation for the construction sector for the following reasons:

  • A greater portion was allocated to ongoing major infrastructure contracts to allow for a recovery in billings following the negative impact from COVID-19;
  • A sizeable amount was allocated for new projects although the distribution of contracts was skewed to smaller- to medium-scale packages;
  • The second-biggest allocation went to Sabah and Sarawak,
  • An allocation was provided to assist G1-G4 contractors, and
  • Various housing and building projects were announced, likely rolled over from Budget 2020. The Finance Ministry forecasts the construction sector gross domestic product growth to recover to +13.9% year on year (low base) in 2021 from -18.7% yoy in 2020 (due to COVID-19 and various movement restrictions).

Very broadly, CGS-CIMB Research continued to view rail contractors as key beneficiaries.

As such, the research house maintained its “add” rating on larger-cap players, namely YTL Corp Bhd, Malaysian Resources Corporation Bhd and IJM Corp Bhd.

“The sector’s upside risk is new actionable details for the HSR and KVMRT 3 under the ERP and 12MP while the downside risk is a delay in mega project procurement due to the extension of the conditional movement control order and political uncertainties,” added the research house. – Nov 9, 2020

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