• The Federal Government will allocate additional funding of RM1bil to improve border security in Sabah and Sarawak in tandem with Indonesia’s relocation of its capital to Nusantara. The allotted amount will be used to upgrade customs, immigration and quarantine (CIQ) facilities as well as roads connecting Sabah and Sarawak to Nusantara.

• The additional allocation of RM1bil is expected to be included in Budget 2023, which will be tabled next month. Assuming Budget 2023 remains the same as tabled in Oct 2022, the increased allotment for East Malaysia will be 8.5% higher at RM12.7bil compared to RM11.7bil previously.

• We believe that the work packages will be awarded via open tender. As such, companies may be submitting competitive bids, which will result in thin profit margins. Smaller contractors, especially subcontractors may face margin compression.

• Contractors based in West Malaysia may be entering into joint ventures with East Malaysian contractors. This will help minimise operational risks and enhance their chances of winning the projects.

• We believe that the RM1bil project will be divided into small packages. Hence, we reckon that the main beneficiaries will be smaller contractors based in East Malaysia or those with existing projects in the region such as Kimlun and WCT.

• Overall, we are largely neutral on this development as the beneficiaries may only be the smaller or unlisted construction companies.

Source: AmInvest Research - 25 Jan 2023