Uncertainties continue to plague construction sector
With near-term sentiment expected to be negative to neutral at best, we downgrade our sector call to ‘neutral’ pending further developments on the implementation of major infrastructure projects as the new government begins its review. Maybank IB Research
KOTA KINABALU: Maybank Investment Bank Bhd’s research arm (Maybank IB Research) downgraded its view of Malaysia’s construction sector to ‘neutral’ as uncertainties related to implementation of key major infrastructure projects are now a key concern for future orderbook replenishments.
“With near-term sentiment expected to be negative to neutral at best, we downgrade our sector call to ‘neutral’ pending further developments on the implementation of major infrastructure projects as the new government begins its review,” the research team said in a report.
It explained that Malaysia’s construction sector is facing uncertainty in regards to the implementation of major infrastructure projects in the near-term, which would affect orderbook replenishment opportunities for the contractors.
Under Pakatan Harapan’s (PH) GE14 manifesto, it pointed out that one of the promises was to review the mega projects awarded to foreigners.
“The ECRL and Gemas-JB Double Track Rail, we believe, would be in the list of such projects for review as the main engineering, procurement, construction, and commissioning (EPCC) contracts have been awarded to Chinese contractors,” it said.
Aside from the mega projects awarded to foreigners, Maybank IB Research also believe the new PH government might also relook at other major infrastructure projects as well, such as the KVMRT 3 (Circle Line), KL-SG HSR, Pan Borneo Sarawak and Pan Borneo Sabah Highways which could lead to possible delays in implementation or cost-downs of these projects.
“Delays in implementation or postponement of these projects would affect the orderbook replenishment opportunities for the contractors.
“That said, this would help the new government in controlling its fiscal deficit, especially with the zero-rating of the Goods & Services Tax (GST) effective June 1, 2018 which would impact the government’s revenue,” the research team opined.
On the flip side, the review of mega projects could also turn out to be a positive should these projects proceed and the main EPCC contracts shift back to Malaysian contractors to control the country’s current account, Maybank IB Research highlighted.
“Those with proven track record and experience in spearheading large infrastructure works could stand to benefit.
“We also expect the urban rail transport infrastructures such as the KVLRT 3 and KVMRT 2 which have already awarded out contracts (majority to local contractors) to proceed with their implementations,” it said.
PH’s GE14 manifesto also moots the idea of reviewing all highway concession agreements, taking over every toll concession with the ultimate aim of abolishing highway tolls in stages.
Maybank IB Research said, “At minimum, the costs involved are the outstanding debts issued by the concessionaires.
“Based on the Bond Price Agency Malaysia’s (BPAM) figures as of April 23, 2018, there is a total of RM55.3 billion of outstanding toll bonds in circulation. However, compensation to equity holders are less clearly defined.”
It added, “Public listed companies (PLCs) which own highway concessions are also facing potential earnings risk should the concessions be terminated before their agreed end-dates and pending further clarity on the form of compensation.”
Following the downgrade to its construction sector call to ‘neutral’, Maybank IB Research also revised its calls for stocks such as Hock Seng Lee Bhd, Gamuda Bhd, Lingkaran Trans Kota Holdings Bhd, and Kimlun Corporation Bhd.