Investment Highlights

• We maintain our UNDERWEIGHT recommendation for the construction sector. Given the still elevated national debt and reduced petroleum revenues, we believe the government has very limited room for fiscal manoeuvre, which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term.

• Our view is validated by S&P Global Ratings’ downgrade of Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus. Nonetheless, the international rating agency affirmed its “A-” long-term and “A-2” short-term foreign currency sovereign credit rating, as well as its “A” long-term and “A-1” short-term local currency ratings on Malaysia.

• Similarly, we do not expect any pick-up in private sector jobs (predominantly property projects) given the acute oversupply situation in the high-rise residential, retail mall and office segments.

• Against this backdrop, the news flow on the local construction sector has largely been negative of late: 1. Contrary to market speculation, the RM110bil KL-Singapore High Speed Rail (HSR) project has not been revived. Instead, the governments of Malaysia and Singapore have agreed to extend the deferment of the project to 31 Dec 2020, from 31 May 2020; 2. Contrary to market expectations, the RM21bil MRT3 project has not been included in the newly announced short-term National Economic Recovery Plan (Penjana). Recall, Gamuda has been pitching to the government the idea to earmark the RM21bil project as one of the “anchor” shovel-ready infrastructure projects to revive the economy in the aftermath of the Covid-19 pandemic. Gamuda is confident to hit the ground running in about three months if the project is to be awarded to it directly (vs. 12–18 months if the project is to be awarded via an international tender); 3. Originally scheduled on 6 Aug 2020, the tabling of the 12th Malaysia Plan (which, among others, will earmark mega public infrastructure projects to be implemented in 2021–2025), has been postponed to “a later date”, while the tabling of Budget 2021 has been rescheduled to 6 Nov 2020 from 2 Oct 2020; and 4. While the Chinese main contractor for the RM44bil East Coast Rail Link project has since May 2020 been dishing out subcontracts to local players, these jobs are of: (1) low value, i.e. earthworks and drainage; and (2) smallish in terms of size, i.e. ranging from only RM40mil to RM100mil.

• Meanwhile, there has yet to be any indication from the new government that it will honour the RM2.36bil toll concession disposal deal signed between the previous administration and Gamuda. The proceeds from this deal, if it materializes, could come in handy for Gamuda, if the Penang state government decides to fund the Penang South Reclamation (PSR) component (i.e. the reclamation of three man-made islands with a total area of 4,200 acres at the southern tip of Penang Island) under the Penang Transport Master Plan (PTMP) project via a contractor financing/deferred payment scheme.

• To recap, under the scheme, the appointed contractor for the PSR project is required to come out with RM2.5–3.0bil to fund the reclamation of the 790-acre Smart Industrial Park on the 2,300-acre Island A. Once completed, the state government will sell the industrial park. The cash flow and profit raised from the sale of the industrial park will be used to pay the contractor and also ploughed back to complete the reclamation of Island A, Island B (1,100 acres) and Island C (800 acres), as well as the LRT and Pan Island Link highway under the PTMP project.

• Meanwhile, Sarawak has decided that it wants to take control of its own destiny by resorting to state reserves to fund RM11bil of public infrastructure projects, including the Coastal Road, Second Trunk Road and 11 mega bridges. However, the rollout of work packages from these highly publicised projects seems to have hit a snag after the initial hype.

• We may upgrade our UNDERWEIGHT call on the sector to NEUTRAL/OVERWEIGHT if the government decides to revive key public infrastructure projects, particularly, the KL-Singapore HSR and MRT3, despite the fiscal constraints.

• We do not have any top pick for the sector.

Source: AmInvest Research - 29 Jun 2020