Clearing the air for construction

For the past year, Malaysia’s construction sector has been plagued with uncertainties following the transition of its administration to a new government.

The fates many new and upcoming major government-backed infrastructural projects nationwide are placed in limbo as the new government weigh on the feasibility of each of these projects and its financial impact on the nation’s growth and government’s budget.

Since the government’s transition, the construction sector has been particularly affected by this postponement of projects.

According to MIDF Amanah Investment Bank Bhd’s research team (MIDF Research), business confidence in construction sector remains in negative territory since the second quarter of 2018 (2Q18).

“Revision of government- backed infrastructure projects and fiscal consolidation as mentioned in the Budget 2019 are among factors for the continuous pessimism in the sector,” it opined.

This is slightly worrying as the research team had pointed out that the construction sector’s contribution to Malaysia’s gross domestic product (GDP) has been growing, underpinned by private investments.

“Share of construction sector to Malaysia’s GDP increases modestly during post-global financial crisis (GFC) period.

“3.4 per cent in 2010 risen to 4.6 per cent in 2018. The rising construction share is in tandem with the contribution of private investment, 12.4 per cent to 18.9 per cent within eight years,” it said.

However, it highlighted that the growth rate of construction sector has been on declining trend since 2012 as investments of private and public tapering down.

“Following the oil price plunge

in 2014, government investment contracted for three-consecutive years from 2014 to 2016.

“Following the change of Malaysian government on May 9, 2018, governmentbacked infrastructure projects particularly railways had to be postponed and put under revision by the new government.

“In 2018, public investment returned to contraction at 5.4 per cent and construction sector grew at seven-year low of 4.8 per cent,” MIDF Research noted.

In terms of sector’s valuation, it said, the sector has been falling immensely, in the greater part of 2018 following a series of construction news deemed negative by investors.

“Largely, sentiment turned negative due to possible postponement and cancellation of huge scale railway projects, namely Light Rapid Transit 3 (LRT3), Mass Rapid Transit 2 (MRT2), High Speed Rail (HSR) and East Coast Rail Line (ECRL) to name a few,” it added.

Nevertheless, as the government clears up some uncertainties on the development of several of these huge-scale projects, the performance of the construction sector sect has been improving.

The T research team at Kenanga Investment Inv Bank Bhd ( Kenanga Research) Res said currently, the KLCON Index Ind is trading at a one-year forward price earnings ratio of 12.2-folds, close to its 10-year average of 13.3- folds, after staging a strong rebound of 60 per cent from its weakest sevel of 7.6- folds (down three standard deviation to the 10-year average). )

“We strongly believe that the sector’s re- rating catalyst is premised on the government’s direction on the future development plans like the potential continuation of the MRT3 and HSR,” it said.

In the near term, MIDF Research expect fundamentals to advance gradually.

“We believe convergence to the e whole market index (KLCI) is likely, driven by the sector’s long-term prospect, declining material prices, and improved sentiments.

“Our view was predicated on KLCON’s recent troughs level, signalling that the worst had been priced in. In the near term, recovery in fundamentals could be gradual as local contractors have to recognise the costs for delays and narrowing cash flows,” it added.

Furthermore, confidence in the sector should rebound as today, many of these projects have either been given the go-ahead or the financial allocation to these projects have been reduced.

There are also ample opportunities in East Malaysia as the Sarawak government’s RM9.1 billion allocation for infrastructure projects in the state is expected to fuel optimism in the sector.

Revision of government-backed infrastructure projects and fiscal consolidation as mentioned in the Budget 2019 are among factors for the continuous pessimism in the sector. MIDF Research