• We provide additional view further to our Budget 2021 commentary on Friday. A higher DE of RM69bn (+38%) is positive for construction sector given high 80% correlation with sector GDP. Assuming 50% comprise construction cost, this would present RM40-45bn worth of potential job flows.
• Budget 2021 witnessed government reinstating MRT3 and RTS while commencing negotiation with Singapore to revive HSR.
• In absence of major projects announced, Budget 2021 witnessed higher allocation to rural development with smaller contract values
• Maintain our NEUTRAL rating on construction sector.

Higher development expenditure (DE) in Budget 2021. Despite the concern on low income from low oil price and tax collection during Covid-19 pandemic, PN government surprised the street by tabling higher DE allocation in Budget 2021 of RM69bn (+38%). We believe nominal construction GDP should grow strongly given the high 80% correlation with DE. Although we did not witness new projects to serve as additional catalyst for the sector, we foresee the reinstatement of various mega projects as a serious effort to revive recovery of economy, as it involved amount of RM80-90bn (including HSR). Assuming 50% of this comprise construction cost, this would present RM40-45bn worth of potential job flows. Moreover, emphasis on local content in the construction process would energize local construction activities.

Reinstatement of mega project. The government decided to revive MRT3 as well as give green light for HSR negotiation with the Singapore government. Although no further details were available on HSR, we expect a new alignment with to be introduced and we believe the implementation model of the HSR project could emulate the project structure of the JB-Singapore RTS project, but on a larger scale. While for MRT3, we believe it is more vital as compared to the HSR as it will complete the last ring of the final KVMRT2 which is due for completion in 2022. We reckon that revival of both MRT3 and HSR is positive to the sector and will benefit railway contractors such as IJM, SunCon, MRCB, WCT, YTL Corp, Gamuda, MMC and GKent.

Development of rural areas. In absence of new major projects announced, Budget 2021 witnessed higher allocation to rural development with smaller contract values, e,g for roads, bridges, schools and water supply projects. We view this positively as it will benefit smaller contractors, especially in the G1-G4 contractors. We expect procurement and tender process in 2021 to be prioritised the RM3.8bn new projects, given the delays and disruptions caused by Covid-19.

Prelude to other mega projects revival. We reckon that the reinstatement of MRT and possibly HSR will serve as a prelude for various other mega projects. We believe most of the announcements will be unveiled in the 12MP. Arguably, this may be the most important Malaysia Plan to achieve a “high income nation” status. Similar to past Malaysia Plans, we expect some excitement for the construction sector.

Maintain NEUTRAL. In conclusion, we are turning warmer on the construction sector given the revival of several mega projects (MRT3, RTS and possibly HSR). Once firmer news on HSR is materialised, we believe the sector could see better days ahead and put its worst period behind. Our top pick in the sector is Kerjaya Prospek (BUY, TP: RM1.30), which is trading at 13x forward earnings as compared to the sector’s average of 12x.

Source: BIMB Securities Research - 9 Nov 2020