KUALA LUMPUR (July 15): Hong Leong Investment Bank (HLIB) Research has maintained its “neutral” rating on the construction sector, saying it believes the recent positive news flow on mega projects is largely offset by weaker private jobs outlook which has plagued the sector since the 14th general elections in May 2018.
The research house named Sunway Construction Group Bhd (SunCon) as its top sectoral pick with a “Buy” rating and a target price of RM2.10) due to its strong balance sheet, extensive track record of infrastructure projects to leverage on pump priming, and strong support from its parent company Sunway Bhd.
In a note today, HLIB said it expected contract awards to pick up mildly in the second half of this year, adding that the current Perikatan Nasional (PN) government has reiterated their commitment towards ensuring execution of projects under Budget 2020.
“Notably, some ECRL [East Coast Rail Link] Section B job awards for initial works have materialised going to Gadang (RM82 million), AQRS (RM37 million) and Ho Hup Construction (RM103 million). Gadang’s management has placed conservative margin guidance of 3%-5% after factoring in Covid-19 impact (possibly from standard operating procedures).
“Recently, Section A was also given final approval which could result in job awards toward the end of 2020.
“Meanwhile, Section C which saw heaviest realignment by the Pakatan Harapan (PH) government completed its public inspection period recently.
“However, latest reports suggest potential realignment for Section C (Mentakab-Port Klang) whereby the Barisan Nasional era alignment crossing through Bentong to Gombak (involves a 16km tunnel) could make a comeback. Costs for the latter are certainly higher (estimated RM8 billion or more) and could require reworking the existing financing structure.
“Despite potential implementation delays for Section C, they may not be substantial as previous alignment has undergone public inspection in 2017,” it said.
Besides the ECRL, PN has also reiterated its intent on expediting the progress of the Sabah portion of the Pan Borneo Highway.
“We believe an ailing economy will provide the impetus for the government to reaccelerate the project.
“Up north, Penang Transport Master Plan (PTMP) PDP [project deliver signing] signing was formalised with fees ranging between 5.0%-5.75%. Reclamation works for Island A are targeted to commence in CY21,” it noted.
Meanwhile, in terms of funding, the research house said the appointed PDP is extending a RM1.3 billion bridge loan with the remaining gap bridged by state issued bonds.
“We reckon chances for federal involvement in the project are slim to nil. Recent cancellation of the Penang Hill cable car project (RM100 million) despite being included in Budget 2020 point towards increasingly frosty relations between state and federal government.
“As such, rolling out the overall PTMP may be slow, depending on funding and land monetisation progress. Down south, negotiations for the RTS [rapid transit system] are close to completion (only 2 issues out of 222 issues remain unresolved). If things go swimmingly, construction works could start as early as Nov 2020,” added HLIB.
In addition, the research house has indicated that contractors under its coverage are operational with works gradually ramping up to between 40%-80% of pre-Movement Control Order operating capacity. It mentioned its key downside risks include political leadership changes or hung parliament, resurgence of Covid-19 cases as well as margin downside risks such as SOP measures, labour constraints and delays.