• 2QCY20 witnessed the construction sector being badly hit by the zero on-site construction activities as a result of covid-19 pandemic.

• No major contracts were announced except for ECRL-related works, and still status quo on HSR. • The delivery of several projects will be stretched for another 4-6 months and ultimately lower billing progress.

• There is urgent need to revive big-ticket items during the Budget 2021 announcement due to its high multiplier effect to the economy

• We believe Sarawak will emerge as one of the bright spots in term of contract flows in 2HCY20 after both Sarawak state government and Federal government struck a deal on petroleum products sales tax.

• Maintain our NEUTRAL rating on construction sector.

Earnings wiped out during 2QCY20

2QCY20 witnessed the construction sector being badly hit by the zero on-site construction activities on the back of covid-19 pandemic. Construction activities slowly opened up starting May-20 but the progress remained slow for the rest of 2QCY20 given contractors had to sort out various issues namely (i) tight standard operating procedure (SOP) (ii) supply chain and (iii) manpower.

Latest news on construction

Off late, market has been abuzz with newsflow that (i) the Klang Valley Double Track Phase 2 (KVDT 2) could be put up for a re-tender (ii) a proposal has been made to construct an alternative road linking Seremban in Negeri Sembilan to Kemayan in Pahang. We believe the interest on the construction sector was sparked by this news; but we are neutral on this development given both are still in preliminary discussion.

Contract announcements still quiet

So far, no major contracts were announced except for ECRL related works, of which a contract sum of RM300m was announced up until Aug-20. Meanwhile there is still no changes on HSR project status despite the progress made during 1QCY20. We foresee contract announcement to remain tepid throughout 2HCY20 given the uncertainties on government finances, although there could be news flow in the upcoming Budget 2021 announcement. As such, we expect tender announcements to remain slow throughout 2HCY20, and we only expect news on ECRL and Pan Borneo Sabah-related works. Given this scenario, we believe the construction sector is still lacking the necessary boost to provide excitement for investors.

Depleting orderbook

The contractors we met so far stressed that the delivery or handover of the projects on hand have been stretched for another 4-6 months and would ultimately lower the billing progress for 2HCY20. However, we reckon some on the contractors such as Kerjaya Prospek will stand out from others given their work execution, aggressive tendering and healthy new job pipelines during the year. Gradual earnings recovery We believe all is not lost for contractors and we anticipate a gradual earnings recovery in 2HCY20 given that progress works now have reached 80%-90% of pre-MCO progress. We understand that it will take a further 2 months for construction activities to achieve normalise level due to the tight SOP to follow.

Budget 2021 wishlist

In order to boost the sector, there is urgent need to revive big-ticket items during the Budget 2021 announcement due to its high multiplier effect to the economy. In addition, despite focusing on large infra projects that have greater spill-over impact on the economy, we expect that the government will also focus on smallish jobs to boost the construction sector. We expect basic infrastructure projects such as road upgrading, hospital, water, sewerage and rural area development projects to be rolled out by government this year.

Hopeful for projects in East Malaysia

We are hopeful that the development in Sarawak would accelerate given that the state government and Federal government finally struck a deal on petroleum products sales tax imposed by the Sarawak government for the year 2019. This will translate into an additional RM2bn to Sarawak’s war chest to spend on development. We believe Sarawak will emerge as one of the bright spots in terms of contract flows in 2HCY20.

On the positive side

Despite earnings being totally wiped out during 2QCY20, this was more than offset by lower operating expenses incurred during the non-activity of MCO period. Overhead expenses during the period have been under control and this will ensure contractors’ margins to remain stable. Contractors also highlighted that during this period, they will not simply tender for low-margin works for the benefit of orderbook replenishment, but would rather lose the job if the margins may end up being razor thin due to intense bidding.

Recommendation

Given further delay of mega projects roll-out, we expect a lull in construction activities in the immediate term. Maintain our NEUTRAL rating on construction sector amid the headwinds ahead. We see little prospect that can excite the sector or boost sector’s earnings this year and next.

Source: BIMB Securities Research - 10 Sept 2020