Construction sector
Maintain overweight: Development expenditure is targeted to increase strongly by 15% year-on-year (y-o-y) in 2015 to RM48.5 billion. This is significant considering that y-o-y changes for 2011 to 2014 only ranged between 1% to -12%. Given its high correlation (81%) to development expenditure, growth in nominal construction output is expected to be strong.

Real construction growth has outperformed overall gross domestic product (GDP) since the first quarter of 2012. Our economics team projects this to continue in 2015 with construction growth at 10% on back of GDP of 4.8%. Domestic contract awards to listed contractors were robust with 2014 amount at RM17.9 billion, displaying a 16% y-o-y growth.

The 11th Malaysia Plan (11MP) [2016 to 2020] will be unveiled in May 2015. This will be the most critical Malaysia Plan as it ends in 2020, the target timeline to achieve a “high income nation” status. Similar to past plans, we expect some excitement for construction.

The key mega projects that we expect to be rolled out over the next one to two years include the mass rapid transit Line 2 (RM23 billion), light rail transit Line 3 (RM9 billion), and Warisan Merdeka (RM3 billion). There are also a variety of highways such as the open tender portion of the West Coast Expressway (RM2.2 billion), the Sungai Besi-Ulu Kelang Elevated Expressway (RM4 billion) and Damansara-Shah Alam Highway (RM4 billion).

Concern is rife that low oil prices would lower government revenue which may lead to a cut in development expenditure to ensure the fiscal deficit target of 3% is met.

We believe that lower oil revenue will be offset by savings from the removal of fuel subsidies. The strong development expenditure increase for 2015 has also been paired with flattish operating expenditure. Our economics team estimates that development expenditure growth will come in flat should the crude oil price average of US$63 (RM225) per barrel for 2015.

Even if development expenditure is cut, this should not adversely impact the roll-out of mega projects as they are mostly implemented “off balance sheet” by the government.

We retain our “overweight” rating on construction premised on three catalysts: (i) ramp up in development expenditure; (ii) continued roll-out of mega projects; and (iii) unveiling of the 11MP. — HLIB Research, Jan 8, 2015.

This article first appeared in The Edge Financial Daily, on January 9, 2015.