- As part of the revised Budget 2015, Prime Minister Dato’ Seri Najib Razak announced that development spending will be maintained at RM48bil. This was unveiled as the Malaysian government strives to achieve a fiscal deficit target of 3.2% for 2015 (2014E: 3.5%) amid lower oil revenues.

- People-centric projects involving public housing, flood mitigation, water supply, electricity and public transport infrastructure (e.g. Pan Borneo Highway) will be implemented.

- Likewise for select high-impact infrastructure projects such as the Klang Valley MRT2, LRT3 and KL-Singapore High-Speed Rail.

- In addition to a sum of RM800mil being allocated to reconstruct flood-hit areas (e.g. schools, hospitals, roads and bridges), another RM893mil has been set aside for flood mitigation projects.

- While not entirely unexpected, we view the revised Budget in a positive light for Malaysian contractors. This is in line with our earlier conviction that the big-ticket rail related jobs – i.e. Klang Valley MRT2 and LRT3 – will forge ahead. For the former, the MMC-Gamuda JV has been appointed as the Project Delivery Partner (PDP).

- Gamuda is also our favoured bet to bag the PDP role under the Penang Government’s RM27bil Public Transport Master Plan. The award of the PDP contract could be out within six months from the closing of the tender exercise in February.

- We see local Sarawakian contractors, namely Hock Seng Lee and KKB Engineering, as potential beneficiaries of the Pan Borneo Highway – although its implementation would likely be on a long-term basis.

- Sarawak Cable, fortified by its acquisition of the Leader Group’s cable businesses (completed last month), is a strong bet as it vies for electricity and transmission line jobs in Peninsular Malaysia and East Malaysia.

- However, we believe the flood-related rebuilding initiatives present fewer job opportunities for listed contractors. The associated works could be carved out into smaller packages, with priority accorded to the smaller local contractors in the affected areas.

- We retain our OVERWEIGHT stance on the construction sector with Gamuda and IJM Corp as our top large-cap picks due to their secured orderbook positions. Furthermore, orderbook prospects would be even clearer when the 11th Malaysia Plan (11MP) is unveiled in May.

Source: AmeSecurities