1H20 a subdued period for construction sector amid political uncertainties

KUALA LUMPUR (March 5): The recent political developments that led to the change in government have dimmed the bright spots for the construction sector, said CGS-CIMB Research, given concerns over the implementation of new infrastructure projects that have been planned by the preceding government under Tun Dr Mahathir Mohamad.

In a note today, CGS-CIMB analyst Sharizan Rosely said channel checks by the research house revealed more concerns than optimism surrounding the projects previously outlined, including the Johor-Singapore Rapid Transit System (RTS), new tenders for the East Coast Rail Link (ECRL), awards for the Light Rail Transit (LRT), the highway scopes of the Penang Transport Master Plan (PTMP) and the KL-Singapore High Speed Rail (HSR).

“As a political change-of-guard would typically impact project approvals, contract tenders and award timelines, we believe 1H20 would turn out to be a subdued period for contractors, in terms of sector-positive news flow, casting a prolonged overhang on share prices of contractors that were previously perceived to benefit from the new implementation cycle for large-scale contracts,” he said.

“We continue to expect the sector’s contract award momentum in FY20 to come off a low base, from our estimated RM80 billion total jobs awarded in 2019, compared with FY18’s RM134 billion as per the Construction Industry Development Board’s data,” added Sharizan.

The analyst also believes that the RM18 billion PTMP could be downplayed, given uncertainties as to whether the Penang state government would be able to raise RM10 billion in bonds, backed by the then-planned federal government guarantee, due to the change in Cabinet ministers including the finance minister.

The ability of the lead contractor of PTMP to raise working capital — via the RM6.2 billion acquisition of highways by the Ministry of Finance — remains to be seen, he said, amid risks of further delays for the deal closure.

“We feel that the sector overhang could sustain in the coming months due to the political uncertainties, weighed by diminishing sector bright spots. We reiterate our neutral sector rating and expect share prices to remain weak,” Sharizan said.

The research house sees Sunway Bhd, via Sunway Construction, to be one of the key bidders for the RM2 billion Iskandar Bus Rapid Transit (BRT) and RM3.2 billion RTS, while YTL Corp Bhd could be reviving its potential exposure to the HSR project.

At the time of writing, the Bursa Malaysia Construction Index stood at 182.79 points, down 12.47% year-to-date.

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