Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on January 4, 2019

Construction sector
Maintain neutral:
Domestic contract awards to listed contractors totalled RM4 billion in the fourth quarter of 2018 (4Q18) at -30% quarter-on-quarter (q-o-q) and -64% year-on-year (y-o-y).

Contract flows continued to slow down after a brief rebound in 3Q18 as the government reprioritises major infrastructure projects. We expect a continued slowdown in contract awards going forward as development expenditure for 2019 is forecast to decline slightly to RM54.7 billion (-0.4% y-o-y).

For the cumulative 12 months of 2018 period, domestic and foreign contract awards amounted to RM18.3 billion and RM406 million respectively, decreasing 37% and 85% y-o-y. Foreign contract awards amounted to RM148 million in 4Q18 (+36% q-o-q; -90% y-o-y), all from piling work contracts in Singapore. This indicates that civil infrastructure projects remain robust in Singapore and going forward, we expect more domestic contractors to bid for foreign jobs, especially in Singapore given its geographical proximity and also a continued slowdown in the domestic construction landscape.

Contractors under our coverage that are expected to compete for jobs in Singapore are Gamuda Bhd, Kimlun Corp Bhd and Sunway Construction Group Bhd.

We expect smallish basic infrastructure projects such as road upgrading, hospital, water, sewerage and rural area development projects will be rolled out by government this year which we believe is insufficient to spark any enthusiasm back towards the sector.

We do not discount potential events, such as the award of Phase 2 of the Klang Valley Double Track Project (RM5 billion) and news flow regarding the East Coast Rail Link project (possible revival) and the Pan Borneo Highway in Sabah could alleviate the pessimistic sentiment towards the sector. Job flows in Peninsular Malaysia slowed down following a change in the federal government.

We understand industry players are aiming for jobs in Sarawak as the Sarawak chief minister has mentioned that emphasis will be put on state water and rural road projects after the decision to shelve the Kuching light rail transit project. Funding for those projects is expected to come from Sarawak state reserves (about RM31 billion) which insulate the projects from the risk of a reduction in federal government spending. The Sarawak Coastal Road and Second Trunk Road projects with an estimated combined value of RM11 billion are expected to open for bidding in the near term. We have maintained our “neutral” call on the construction sector post changes in federal government and scrapping of mega rail projects.

The domestic construction industry’s landscape is expected to remain challenging in the near term. The 37% decline in domestic contract awards in 2018 supports our view. — Hong Leong Investment Bank Research, Jan 3

      Print
      Text Size
      Share