Investment Highlights

• The uncertainty surrounding the tabling of the 12th Malaysia Plan (12MP) scheduled for March 2021 (prior to the declaration of a state of emergency nationwide from 12 Jan to 1 Aug 2021) reinforces our UNDERWEIGHT stance on the local construction sector over the next 6–12 month.

• It has been close to a month since the suspension of parliament following the declaration of a state of emergency nationwide. However, it is still unclear if the tabling of the 12MP (2021–2025) would be postponed to another date, or the government would roll out the 5-year development plan for the nation in the absence of the scrutiny by parliament (in which case, the legitimacy of the plan could be subject to challenges in future).

• Flashback to the year 2015, its predecessor the 11th Malaysia Plan (11MP) (2016–2020) was tabled by the then Prime Minister Datuk Seri Najib Razak on 21 May 2015 and debated by the members of parliament for five days from 25 May 2015. Thereafter, replies from ministries were heard for three days before the plan was finally approved by parliament slightly past midnight on 16 June 2015. It took close to a month to compete the entire process.

• The uncertainty surrounding the 12MP aside, we maintain our view that the government will have very limited room for fiscal manoeuvre given the elevated national debt, weighed down further by the economic impact of the pandemic (including reduced tax and 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 long-term 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. We believe the recent termination of the KL–Singapore high-speed rail project should serve as a wake-up call to the market.

• Operationally, construction players 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 Worker’ 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).

• 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 A$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 - 9 Feb 2021