NOTWITHSTANDING the transition into endemicity, the construction sector’s medium-term earnings trajectory may somewhat be held back by margin pressures arising from inflationary building material cost environment and manpower shortages.
Beyond that, RHB Research is of the view that while the Government has projected the construction sector’s output to rebound by 11.5% year-on-year (yoy) in 2022, this comes off a low base given 2021’s industry output contracted 5.2% yoy.
“Local contractors are expected to continue facing labour shortages even after border restrictions were eased on April 1,” commented analyst Adam Mohamed Rahim in a construction sector update.
“The reason: Applications from employers will have to go through the Home Ministry’s evaluation committee to determine the number of foreign workers eligible for employment. As such, this could lead to a lack in manpower and result in construction work delays.”
Elsewhere, RHB Research which reiterated its “neutral” outlook on the construction sector, also highlighted that the monthly average price of raw materials is rising with steel bar prices spiking 21% yoy to reach RM3,411.75/tonne in March, surpassing the peak of RM3,255.00/tonne in July 2021.
“Contractors may resort to pricing accordingly the increased input costs into new tenders which may lead to higher working capital needs that could push financing requirements higher,” suggested the research house.
While the Government’s disclosure on details of the Mass Rapid Transit Line 3 (MRT3) project seems to have sparked some positivity in the market, RHB Research is wary of how the project will be funded.
“(This is) likely through a hybrid financing model in addition to debt issuance by the Finance Ministry (MOF) whereby contractors will have to fund construction costs upfront amid the country’s limited fiscal headroom,” projected the research house.
“Therefore, we cannot rule out the possibility of future mega projects being scaled down in terms of value or be financed via private funding initiatives.”
Above all else, there looms concerns over heightened volatility as Malaysia heads closer to the upcoming general election with market talk believing that the 15th General Election (GE15) could happen in 2H 2022.
“Based on the three previous general elections, the Bursa Malaysia Construction Index was found to have underperformed in the six months leading up to polling day,” observed RHB Research.
“We continue to advocate names from the small- and mid-cap spaces like Kerjaya Prospek Group Bhd and MGB Bhd. Overall, we believe they have supportive catalysts to buffer near-term risks, supported by stable order book replenishment rates and robust balance sheets.” – April 14, 2022
