• KL Construction Index continued weaker trend amid various projects being put on hold by government as it reshuffles economic priority due to weakened revenue stream.

• A low oil price environment may jeopardize the development expenditure in the upcoming Budget 2021 announcement

• Nevertheless, government will accelerate projects with high economic impact this year to assist in reviving the economy.

• We expect the government will also focus on smallish jobs to boost the construction sector and economic activity.

• We expect a further delay on the Penang Transport Master Plan (PTMP) as we believe funding the RM46bn project is still the main challenge.

• Maintain our NEUTRAL rating on construction sector amid the headwinds ahead.

KLCON, continued weakening mode

The FBM KLCON index has weakened 56% from its high of 287 points on January 2018. The decline started following the unexpected outcome of 14th General Election that witnessed Pakatan Harapan (PH) government reviewing several mega infrastructure projects awarded during Barisan Nasional tenure. These clearly dampened optimism towards the sector given its strong link to fiscal policies. Cost optimisation measures by the Federal Government led to various mega projects either shelved, reprioritised or re-scoped.

New government focusing on economic recovery

The newly formed Perikatan Nasional government reacted swiftly as Malaysia attempt to counter the economic calamity of low oil price (-36%YTD) and the unprecedented Covid-19 pandemic currently affecting more than 4m people in 200 countries. To combat the economic impact from this double whammy, the government introduced a RM250bn stimulus package, which included RM20bn earmarked to revive infra projects that were put on hold under the previous administration. Under the RM20bn stimulus package, among the projects to be expedited are (i) ECRL projects (total cost RM44bn) (ii) MRT2 projects (RM13bn). Although the projects involved are all under Budget 2020, we opine both projects have greater economic impact that will result in significant multiplier effect on the economy. This could partially lift the weak sentiment clouding the sector and ultimately cushion the fall in contribution from the other sectors as Malaysia enters recession this year.

Other projects could follow soon

Under the previous administration, several high-profile projects were put on hold on the back the cost cutting measures. We believe that only projects with greater economic impact could be revived to tackle the economy slowdown, namely East Coast Rail Link (ECRL) and Pan Borneo Highway Sabah (PBHS) as both projects’ funding have been finalised and budgeted for. Indeed, the MRL (the owner of the RM44bn ECRL) announced its plans to raise bonds with an expected issue size of RM1.8bn (total programme: RM9.5b) while the remaining is to be financed by China EXIM Bank. On PBHS, the government has budgeted close to RM3bn for PBHS construction and we understand there was some progress in early-Mar 2020 where JKR Sabah has called contractors for the pre-qualification exercise for 4 packages (12 out of 32 packages have been awarded to-date).

Source: BIMB Securities Research - 12 May 2020