Investment Highlights

• The termination of the KL–Singapore High-Speed Rail (HSR) project reinforces our UNDERWEIGHT stance on the local construction sector.
• We reiterate our view that the earnings outlook for players is weak. First, the condition of the construction market does not foster pricing power (as job-hungry contractors undercut each other for limited new contracts in the market). Second, they are subject to higher operating cost and lower efficiency (due to restrictions on working hours and worker density on the site, and the additional expenses incurred in upgrading the dormitory for foreign workers in compliance with the Workers’ Minimum Standards of Housing and Amenities Act 1990, also known as Act 446) and higher operating risk (due to the potential stop-work order or enhanced movement control order or EMCO on the dormitory in the event of Covid-19 infections, shortage of foreign workers as borders remain largely closed and the policy to reduce the country’s reliance on foreign workers).
• While other foreign worker-dependent industries, particularly glove manufacturing and plantation, are not spared these challenges, they are in a much more manageable position given the steep rise in the selling prices of their products. In comparison, construction contracts are awarded largely on a lump-sum fixed-price basis.
• We maintain our view that the government will have very limited room for fiscal manoeuvre in 2021 given the elevated national debt, even before the pandemic. The government’s fiscal position has been weighed down further by the economic impact of the pandemic (including reduced petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic. All these have culminated in Fitch Ratings’ Dec 2020 downgrade of Malaysia’s longterm foreign-currency issuer default rating to ‘BBB+’ from ‘A-‘ (on the heels of S&P Global Ratings’ June 2020 downgrade of Malaysia’s outlook to negative from stable).
• Under these circumstances, we believe the government is unlikely to roll out new public infrastructure projects in a major way over the short term including the MRT3 (RM22–23bil). We foresee the tabling of the 12th Malaysia Plan (which, among others, will earmark mega public infrastructure projects to be implemented in 2021–2025), scheduled in March 2021, to turn out to be a non-event.
• Meanwhile, Sarawak has decided 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. Similarly, the Penang state government has planned to fund the Penang South Reclamation (PSR) component (i.e. the reclamation of three manmade 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 bridging loan from the project delivery partner.
• Amidst the uncertainty in the rollout of public infrastructure projects locally, a number of players have ventured or returned to overseas markets. For instance, Sunway Construction in 2020 bagged two highway projects worth more than RM800mil in India on a hybrid annuity model, while Econpile secured a US$85.7mil (RM347.6mil) piling and substructure work subcontract for an “integrated entertainment complex” in Phnom Penh, Cambodia. Meanwhile, Gamuda has been shortlisted for two tunnelling packages of the A$20bil (RM60bil) Sydney Metro West and the AU$2.6bil (RM7.8bil) Sydney M6 motorway in Australia.
• We may upgrade our UNDERWEIGHT call on the sector to NEUTRAL/OVERWEIGHT if the government decides to forge ahead with the implementation of key public infrastructure projects, despite the weak fiscal position.
• We do not have any top pick for the sector.

Source: AmInvest Research - 4 Jan 2021