Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on March 12, 2020

Construction sector
Maintain neutral:
Investors will shift their focus to Sarawak in search of good news for the construction sector. This comes as there may be fewer sizeable job opportunities in Peninsular Malaysia for the time being as the new federal government may want to review the pipeline of projects (which we will discuss more below).

On the other hand, Sarawak has unveiled its state budget with plans to spend RM22 billion on infrastructure projects including the Second Trunk Road (RM6 billion), Coastal Road upgrades (RM5 billion), water grid programmes (RM2.8 billion), rural electrification projects (RM2.4 billion) and telecommunications towers (RM1 billion).

Timing-wise, it would probably make political sense to roll out these projects to stimulate economic activity ahead of the Sarawak state election, which must be held by September 2021. The current state government is helmed by the ruling coalition, Gabungan Parti Sarawak (GPS), a friendly party to the Perikatan Nasional-controlled federal government. In the last state election in 2016, GPS together with other component parties in the then ruling Barisan Nasional coalition won 72 of the 82 state seats to secure a comfortable margin of victory.

To gauge possible share price effects arising from the Sarawak election, we referred to the past three polls to analyse the performance of a basket of Sarawak-based companies across various time periods. In conclusion, there was no visible historical pattern of individual stocks’ performance in the run-up to the election day. Based on our analysis, the most profitable investment period was six months leading to the election date, with average returns of 6.3% in 2006, 7.6% in 2011 and 2.6% in 2016.

Meanwhile, it remains to be seen whether the new federal government will review existing and new major construction projects initially after they take office. Among the high-profile infrastructure projects that have been earmarked to be revived include the RM3.2 billion Johor Baru-Singapore Rail Transit System, with the finalisation of contract terms previously scheduled to be done in April this year, and the about RM60 billion Kuala Lumpur-Singapore High Speed Rail, which is supposed to be revisited by both countries in May 2020.

Next is the about RM40 billion Mass Rapid Transit Line 3, earlier speculated to be considered for revival in the later part of this year, and the RM32 billion Penang Transport Master Plan, with the project delivery partner agreement originally to be inked in the first quarter of 2020 following the previous federal government’s green light to guarantee bond financing for the light rail transit component.

At current price levels, our top sector pick for big-caps is Gamuda Bhd (“outperform” [OP]; target price [TP]: RM3.70). Meanwhile, Hock Seng Lee Bhd (“OP”; TP: RM1.69) is our selection for exposure to rising construction activity in Sarawak. — Kenanga Research, March 11

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