Weak fiscal position behind muted 12MP prospects for construction sector

OUTLOOK of the construction sector looks subdued as lack of details on the prospects of new mega project roll-outs in 2022 is unlikely to excite the sector.

This has prompted CGS-CIMB Research to reiterate its “neutral” stance on the construction sector although it was overall positive on the 12th Malaysia Plan’s (12MP) headline RM400 bil development expenditure.

“The absence of Mass Rapid Transit Line 3 (MRT3) (circa RM20-30 bil) and the Kuala Lumpur-Johor Bahru High Speed Rail (HSR) (circa RM30 bil) is a setback although they could re-emerge in Budget 2022 (Oct 29) once proper planning and feasibility reviews are in place,” opined analyst Sharizan Rosely in a construction sector update.

Based on CGS-CIMB Research’s compilation, the total value of ongoing contracts works out to be RM95 bil with the largest being the East Coast Rail Line (ECRL).

Major ongoing infrastructure projects under the 12MP (2021-2025)

The 12MP booklet highlighted that in view of constraints in the allocation of development expenditure, projects under the 12MP will be implemented in phases to ensure fiscal sustainability.

“In our view, the finalisation of the public-private partnership (PPP) 3.0 model by mid-2022 could be a platform for the Government to re-launch new mega contracts and reactivate MRT3,” reckoned the research house.

On the bright side, however, is that the 12MP will lay the foundation for a comprehensive water transformation agenda by accelerating the adoption of integrated water resource management (IWRM)

“HSS Engineers Bhd and Taliworks Corp Bhd are potential beneficiaries of the RM26 bil allocation for the water sector while we stick to Gamuda Bhd as our top pick for a revival in MRT 3,” projected CGS-CIMB Research.

Meanwhile, Kenanga Research downgraded the construction sector to “neutral” (from “overweight” previously) given the less promising medium-term prospects.

“In light of the weaker prospects for the local infrastructure space coupled with the government’s less than ideal fiscal position, we choose to dial down valuations for key infrastructure contractors under our coverage namely Gamuda Bhd and IJM Corp Bhd,” noted analyst Lum Joe Shen.

“Although year-to-date contractors’ replenishment has been decent (inline with revised replenishment targets), replenishments are running behind management guidance due to the numerous movement control orders (MCOs) which deferred contract roll-outs,” observed Kenanga Research.

“Consequent to these, outstanding order book of contractors under our coverage have been declining year-on-year (yoy) since FY2018. Moving into FY2022, we opine that contract roll-outs will be gradual instead of a strong rebound.” – Sept 28, 2021

Pic credit: The Star

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