MALAYSIA’S construction sector will likely remain subdued for the rest of 2022 although prospect of the Mass Rapid Transit Line 3 (MRT3) roll-out in December could remedy the outlook even with likelihood of delay risks.
Against such backdrop, Hong Leong Investment Bank (HLIB) Research reiterated its “neutral” stance on the sector by remaining cautious due to on-going execution risks, margin pressure, labour situation and possible event risk in 2H 2022.
“Based on 1Q 2022 earnings, margins for some contractors have fallen significantly with some carrying margin markdowns,” observed analyst Edwin Woo in a constriction sector update.
“Given how persistent costs pressures have been, we expect such weakness to remain. Some private sector contracts do have risk sharing clauses while public sector contracts with design flexibility have built in escalation clauses.”
“However, we believe a majority of contracts are on a fixed lump sum basis. Additionally, the cost benchmark used in claiming VOs (variation orders) lags the actual costs escalation. We also flagged the lapsing of COVID-19 relief VOP (variation of price) period (Dec 31, 2021) which covers government projects,” added HLIB Research.
Another source of uncertainty, according to the research house, is dwindling labour supply as replenishment has been slow to come by. This would lead to further upward pressure on labour rates as the situation looks to remain unresolved for the remainder of 2022 (wages are above the minimum RM1,500/month since last year).
“This poses further challenges in the MRT3 roll-out considering the scale of the project. There is a potential for crowding out labour for non-MRT contractors,” noted HLIB Research.
“Despite a beleaguered jobs flow situation in 1H 2022 that we believe is caused by relentless inflationary pressure and labour shortage, we continue to expect recovery in flows this year mainly driven by the MRT3 roll-out in December 2022.”
Given that the MRT3 is private finance initiative (PFI)-based, risks of delays to foot high subsidies (this year) may not be substantial, according to HLIB Research. Based on industry checks, the three civil turnkey contracts could carry a total value of RM27 bil.
“Civil tender briefings were held recently and factoring in the evaluation period, we think that December 2022 is a reasonable timeline (assuming no general election in between). Thereafter, we would expect a string of subcontract awards in 1Q 2023,” projected the research house.
“Given that the minimum payment moratorium period is two years, contractors with better balance sheets are significantly advantaged in tenders.” – July 13, 2022
Main photo credit: Bloomberg
