This article first appeared in The Edge Malaysia Weekly on January 14, 2019 - January 20, 2019

SPENDING on infrastructure is politically important, especially in Sarawak. That is why investors should look east amid lacklustre sentiment elsewhere, say analysts.

“East Malaysia has become the new darling,” TA Securities wrote last month. “In contrast to the weak sentiment of the construction sector in Peninsular Malaysia, the construction sector in East Malaysia is building up momentum.”

In its record RM11.91 billion state budget for 2019, the Sarawak government has set aside RM9.1 billion for development expenditure, two-thirds of which will go towards rural developments.

Among the key projects to be partly funded from the allocations are the Sarawak Coastal Road and Second Link Road, estimated to cost RM6 billion overall, and the State Water Grid project worth RM2.8 billion.

The state also allocated RM2.3 billion to expand electricity supply to rural areas. Sarawak Energy Bhd, the state’s wholly owned utilities company, previously said that coverage was at 95% as at end-2017.

“Our channel checks suggest that the pre-qualification of contractors for the Coastal Road and Second Link Road had closed as of 12 Sept 2018, with tenders for the work packages already ongoing. The earliest we would expect any awards could be by 1Q19,” said Maybank Research last week.

Both Maybank and TA Securities have Cahya Mata Sarawak Bhd (CMS) as their top “buy” to ride the Sarawak infrastructure drive.

“We expect the demand for building materials, especially in Sarawak, to remain strong for the next couple of years... (hence CMS) is expected to be the primary beneficiary from federal and state 2019 budget allocation,” TA Securities said in its 2019 strategy note last month.

CMS is the sole cement supplier in Sarawak and produces other building materials. It also has a construction business and maintains 5,400km of state roads.

In addition, Maybank Research also highlights Hock Seng Lee Bhd (HSL) due to its track record in wastewater management and sewerage — an advantage in pursuing jobs for the State Water Grid project.

“We believe HSL also has the upper hand with a fleet of tunnel-boring machines (TBMs) at their disposal,” it said.

Last Thursday, CMS closed at RM3.13 per share. Maybank has a target price of RM4.10 for the stock and TA Securities, RM4.25.

HSL closed at RM1.37. Maybank has a “hold” call and a RM1.45 target price for HSL.

But a key question is whether a potential change of state government in about two years or less rock the construction sector, with contract reviews and investigations being conducted, as was seen after the May 9 general election?

Analysts The Edge spoke to believe the political uncertainty may impose an “election discount” on some stocks as the state inches closer to the Sept 7, 2021, deadline for the state election.

That said, one analyst who declined to be identified thinks before that discount kicks in, contract awards may spark a rally in the beneficiary counters in the next year or so.

That means an opportunity for investors to take a position now, but only time will tell if the risks will bite.

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