Cloudy outlook for construction

October 21, 2018 | By | Reply More

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PETALING JAYA: The outlook for the construction sector remains cloudy, with muted impact from the 11th Malaysia Plan (11MP) mid-term review, said analysts.

“Given the government’s intention to consolidate its fiscal position, we are of the view that the sector outlook will remain cloudy in the interim owing to the lack of near term catalysts,” said PublicInvest Research in its report.

The construction sector reported an average growth of 7.1% annually in the first half of 2018, lower than the initial target of 10.3% per annum, and is projected to grow even slower in the remaining period at an annual average rate of 4.3%.

PublicInvest Research said it is not surprised with the revised projection as slower growth for the next two years is a reflection of the government’s re-prioritisation of major infrastructure projects.

“The mid-term review of the 11MP threw up no surprises with regard to the construction sector, with guidance of lower growth going forward and reduction in development expenditure among key highlights, though already largely anticipated,” it said.

A few years back, the construction sector was a notable contributor to national growth but this time round, a number of mega projects valued in excess of RM100 billion have been put on hold for further assessment and negotiation.

“Concentration will now be re-prioritised toward the building of affordable housing, public schools and hospitals, as well as improving infrastructure and road network in rural areas,” it added.

It noted that ongoing major highway projects such as the West Coast Expressway and Pan Borneo Highway will proceed as planned while rail projects namely MRT2 and LRT3 will proceed albeit with some delays.

“With negative news flows continuing to swirl around the sector, earnings visibilities are also coming into question now, in addition to inevitable margin squeezes. All said, we maintain our neutral rating on the sector but with a negative bias.

“Re-rating will come from the other big ticket projects getting back on the table, or from new ones not previously accounted for,” it said.

CGS-CIMB said the 11MP mid-term review barely touched on new large-scale projects but emphasised more on what is left on the table, following the review of almost all mega contracts.

However, a slight positive from the prime minister’s speech is that the public-private partnership model will be beefed up in contract procurement.

“We understand that this could take the form of pure cash contracts or land swap deals. This is most relevant to selected small/medium-sized contractors, but we believe the tender environment will be very competitive (oversupply of idle capacity players) and hence unlikely to appeal to all large contractors. Clear proxies for this new angle remains limited, sector wide,” it said in its report.

Outside of the Klang Valley, the 11MP will focus on rural roads, 400 schools to be built or refurbished, rural water infrastructure in Sabah and Sarawak, flood mitigation, airports and affordable housing.

Within the Klang Valley, only the ongoing progress of seven projects will be prioritised namely MRT2, LRT3, Sungai Besi-Ulu Kelang Expressway, Damansara-Shah Alam Highway, Putrajaya-KLIA Highway, Digital Free Trade Zone and River of Life.

“11MP mid-term review provided more clarity on Malaysia’s contract outlook and the government’s stance on contract rollout. We see muted impact on the overall sector, with no upside surprises in new contracts,” said CGS-CIMB.

It maintained its “underweight” rating on the sector, predicated on the sector’s job downturn in 2019, with revival of deferred or cancelled mega rail contracts being an upside risk.

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