• KLCON Index (of 185.83) is currently trading at FY21E PER of 11.5x, -1SD below its 10-year mean and close to GFC lows of 10x. The Budget 2021 witnessed government reinstating MRT3 and RTS while commencing negotiation with Singapore to revive HSR.
• The underperforming construction sector will need a big boost and we think the 12th Malaysia Plan (2021-2025) will partly assist the sector in its revival.
• Despite the recession and MCO, the level of financing to the construction sector remains robust as it stayed above RM5b for 2020 versus RM7b in the previous year.
• While the 12th MP is a forward-looking plan (2021-2025), we believe the immediate beneficiary would be Sabah and Sarawak.
• Despite the higher allocation of RM5.4bn under Budget 2021, the sector will see smaller contract value with priority on rural development.
• We are staying NEUTRAL on the construction sector due to slow contract flows which is unlikely to accelerate any time soon. However, should news on HSR gathers momentum, the sector could see better days ahead.

Valuations still attractive. As of 18 st December 2020, the KLCON Index (of 185.83) is trading at FY21E PER of 11.5x, -1SD below its 10-year mean and close to GFC lows of 10x. We think the sector’s appeal to investors will gradually increase due to possible excitement in 12th Malaysian Plan (Jan 2021) and in anticipation of the potential rollout of mega infrastructure projects namely MRT3, Pan Borneo Sabah, Sabah Sarawak Link Road and potentially HSR. During this time, we do not discount the possibility for the KLCON Index to rise slightly due to positive news flow.

New plan for construction. We reckon the underperforming construction sector will need a big boost and 12th Malaysia Plan (2021-2025) will partly assist the sector in reviving its fortune with several mega projects set to announce, in our view. We expect the budget for 12th MP is set to beat previous MPs budget at higher amount of >RM250bn for this plan (2021-2025) and thus support the long-term prospects for the sector. Arguably, the plan is important for Malaysia to achieve its objective of becoming a high-income nation.

Potential mega project to include under 12th MP. We believe with a total value of RM143.1b, these projects would possibly include the RM68b Kuala Lumpur-Singapore High-Speed Rail (HSR), the RM45b Mass Rapid Transit Line 3 or MRT3 and the RM18bn Penang Transport Master Plan. The others are the RM8.3b Serendah-Port Klang Rail Bypass, the RM3.16b Johor Baru-Singapore Rapid Transit System (RTS) and the RM600m Phase 1 of the Pan Borneo.

ECRL to accelerate pace. ECRL received a new lifeline in 1H20 after it was rejuvenated by the government with a revised lower cost of RM44b vs RM66b previously. So far, only Package A was tendered out (Kota Bharu - Dungun) benefiting 4 contractors (Ho Hup, Gadang, AQRS and AdvanceCon) with combined contract value of RM331m. while the tender award has been lacklustre, larger contractors are hoping the contract awards to be accelerated especially for Package C (Mentakab – Port Klang).

Financing flows. Despite the recession and MCO period slowing down construction activity, the level of financing to the construction sector remains robust as it stayed above RM5bn for 2020 (except during May-20 financing dropped to RM4.7b). Nevertheless, the amount of financing was slower if we compared on yoy basis due to the high base impact in 2019 on the back of acceleration in business activity post-GE14 that witnessed key mega projects was put on hold by PH government. In addition, we predicted development expenditure under 12th MP could rise above RM300b, the highest among previous MPs due to the revival of key mega projects. With RM69b has already been budgeted under 2021, this implies RM231b to be spent for the remaining 4 years (2022-2025).

East Malaysia is immediate beneficiary. While the 12th MP is a forward-looking plan (2021-2025), we believe the immediate beneficiaries are Sabah and Sarawak construction sector. Sarawak is slated to hold its 12th state election by 2021, and we view that the potential increase in project flow could be similar to the previous state elections. Immediate project awards could involve the Trans Borneo Highway which is a 40km stretch that will include a Customs, Immigration, Quarantine and Security complex in Serundong, Sabah. It will link Serundong, Simenggaris, Melinau, Kerayan and Long Bawan in Kalimantan before crossing into Sarawak’s northern interior settlement of Ba’ Kelalan.

Year 2021 to see flattish spending. Under the recently announced Budget 2021, the government allocated higher Development Expenditure of RM69bn (+38% yoy). Despite the higher allocation, we foresee the sector only benefiting from smaller contract value as priority is given to rural development worth RM5.4bn under Budget 2021 allocation. We reckon that the tender process would be accelerated and the project value will benefit smaller contractors of G1-G4 size. We believe the smaller contract values are insufficient to spark any enthusiasm back towards the sector in absence of mega projects revival.

HSR could hit further delay beyond 2021. So far, we believe the project that is imminent for further delay is the KL-Singapore HSR due to issues of cost, alignment and approvals from various parties. While the HSR was mentioned in Budget 2021, it is still subject to negotiation between both governments. Costing remains the stumbling block for both countries after the government in 2018 decided to revise lower the cost that led to the suspension of the projects. We believe the cost of RM44b and the new alignment proposed by the government back then could remain.

MRT3 is immediate project to be revived. For MRT3, we are of the view that the project acts as a low hanging fruit due to its importance to the Klang Valley connectivity and given that the MRT2 project is near completion by 2022 (completion rate 75% end-Aug 2020). We expect the contract could be finalised soon and tender could be called out before end-2021. In addition, we believe that MRT 3 could be prioritized if fiscal prudence is a key consideration due to the cost of RM21b vs RM44b for the HSR. In addition, we believe MRT3’s impact is wider vs. HSR due to the system readiness (in term of skills, workforce, and machineries).

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 MP in order to achieve a “high income nation” status. Similar to past MPs, we expect some excitements for the construction sector when this plan is unveiled.

Recommendation. We are staying NEUTRAL on construction sector due to slow contract flows which is unlikely to accelerate any time soon. Once firmer news on HSR materialised, we believe the sector could see better days ahead. 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 - 21 Dec 2020