Analyst: Sarawak a bright spot amidst lacklustre construction sentiment
Analysts with Kenanga Investment Bank Bhd (Kenanga Research) suggested investors to adopt a “Look East” strategy within construction stocks, as fewer sizeable job opportunities in Peninsular Malaysia will make it challenging for contractors to replenish their orderbooks going forward.
“One bright spot may be in Sarawak, where the state has budgeted to spend RM22 billion on infrastructure projects including the Second Trunk Road (RM6 billion), coastal road upgrades (RM5 billion), water grid programs (RM2.8 billion), rural electrification projects (RM2.4 billion) and telco towers (RM1 billion),” analyst Goh Yin Foo said in a sector outlook yesterday.
This came as Bursa Malaysia Construction Index (KLCON) slumped 37.2 per cent year to date (YTD) compared with the FBM KLCI’s YTD plunge of 18 per cent.
Leading the losses during this period were Muhibbah Engineering (M) Bhd (minus 66.5 per cent), WCT Bhd (minus 63.8 per cent) and Kimlun Corporation Bhd (minus 56 per cent) while Hock Seng Lee Bhd (minus 21.8 per cent) and Sunway Construction Bhd (minus 26.4 per cent) were the relative outperformers.
“Timing-wise, it would probably make political sense to roll out these projects to stimulate economic activity ahead of the Sarawak state election, which must be held by September 2021,” the analyst added.
Essentially, the underlying market sentiment has been ra led by the dire economic consequences on the back of the fallout from the Covid-19 pandemic, which has brought the entire global economy to an almost complete standstill.
Investors also felt nervous about the abrupt change in government a er the political upheavals in late February/early March, Goh said.
“It remains to be seen whether the new Federal government (like its predecessor) will review existing and new major construction projects initially a er they take office,” the analyst added.
Among the high-profile infrastructure projects that have been earmarked to be revived include the RM3.2 billion Johor Bahru-Singapore Rail Transit System (RTS) with the finalisation of contract terms previously scheduled to be in April this year; the RM60 billion Kuala Lumpur-Singapore High Speed Rail, which is supposed to be revisited by both countries in May 2020; the RM21 billion Mass Rapid Transit 3 (MRT3), earlier speculated to be considered for revival in the later part of this year; and the RM32 billion Penang Transport Master Plan (PTMP).
RHB Research Institute Sdn Bhd (RHB Research) in a separate note said the construction sector is likely to post zero growth, continuing from its modest 0.1 per cent growth in 2019.
This comes as the MCO is likely to affect the sector heavily as physical work is restricted.
“Will the government stimulate the economy via construction boost? In our view, the government is not expected to roll out mega infrastructure projects in the immediate-term to pump prime the economy,” Kenanga Research continued.
“While there is logic to bank on construction activities to boost the economy given its wide multiplier effects, the government’s hands are essentially tied for the time being.
“Indeed, the federal government’s already tight financial position will be stretched further by lower revenue (following the oil price collapse and the plunge in tourist arrivals, export receipts) and increased spending (via stimulus measures to mitigate the Covid-19 fall-outs).
“Consequently, our economics team is expecting the budget deficit to widen from 3.3 per cent previously to 4.9 per cent this year.
“In addition, there is the typical time lag for major construction projects to be implemented before we see the economic impact as the government’s most urgent priority at the moment is to alleviate the people’s burden by providing immediate financial support.”