• Committed to drive progress as Development Expenditure (DE) increased by RM15bn.

• Anticipation is rising for a series of expansive infrastructure projects; however, we believe that the realization of the High-Speed Rail (HSR) might encounter an extended timeline.

• Conversely, a resilient infrastructure framework is being developed to bolster the development of the East Coast and East Malaysia.

• The convergence of opportunities for construction sector is emphasized by both the National Energy Transition Roadmap (NETR) and the New Industrial Master Plan 2030 (NIMP).

Overall, the upcoming Budget for 2024 is expected to generate excitement within the construction sector. This enthusiasm stems from the emphasis on opportunities within the sector, as highlighted by both the National Energy Transition Roadmap (NETR) and the New Industrial Master Plan 2030 (NIMP). We anticipate that this emphasis will be further highlighted in the 2024 budget tabling, scheduled for October 13, 2023. Some of the key points include:

Malaysia's Mid-term 12th Malaysia Plan (12MP) has witnessed a notable increase in DE as the government has raised its allocation from RM400bn to RM415bn for the five-year period. To recap, total development spending was RM64.3bn in 2021 and RM71.6bn in 2022 while it has earmarked a RM97bn for 2023, leaving an annual budget of RM90bn each year for 2024 and 2025. Nevertheless, the significant increase signals a concerted effort to accelerate the key projects that are long overdue.

The anticipated mega-scale infrastructure projects, which encompass the Mass Rapid Transit 3 (MRT3), Penang Light Rail Transit (Penang LRT), and flood mitigation projects (RTB), would bolster sector prospects. However, we believe that some of the colossal undertakings, notably the HSR, may require an extended timeframe to be materialised.

We estimate the budget for MRT3 to fall within a range spanning from RM30-45bn, with recent indications suggesting a revised target cost to be below RM45bn. This revised cost estimation was based on cost of MRT Putrajaya Line (MRT2), which shares a similar track layout and design. MRT2, stretching over a length of 57.7km with 44.2km elevated and 13.5km underground sections, was completed earlier this year at a cost of RM30.53bn. Meanwhile, MRT3 is planned to extend across a total distance of 51km, comprising 40km of elevated and 11km of underground segments.

On the other hand, first phase of Penang LRT, which initially estimated at RM10bn, may experience cost escalations due to extensions and considerations for underground sections. Funding for this project could be parked under the DE, as the federal government has committed to funding the maiden project upon a 49% scaled-down version of the total three-man-made Penang South Islands (PSI) project. However, we also consider the possibility that the project could secure funding through a Public-Private Partnership (PPP) arrangement.

Meanwhile, the estimated cost for RTB, originally revised to RM15bn (from RM7bn), has now been projected at RM10.9bn through an accelerated pre-qualified tender process. Earlier this year, the government unveiled plans to re-tender six projects, which encompass the RTB in Sungai Johor, Kota Tinggi, Johor, Phase 3 of the Sungai Golok Integrated River Basin Development in Kelantan and the construction of the Sungai Klang-Sungai Rasau dual-purpose reservoir in Selangor.

As such, we favour Gamuda to be the leading candidate for above mention projects, supported by their demonstrated expertise and prior involvement in MRT and Stormwater Management and Road Tunnel (SMART) project, as well as their exclusive role for PSI.

Beyond these mega projects, the mid-term review of the 12MP has highlighted a range of other sizeable initiatives. These include:

• Bus Rapid Transit (BRT) Systems: Expanding public transportation networks, including BRT systems in Johor Bahru and the Klang Valley.

• Highway Upgrades: Projects such as the upgrading of the Senai-Desaru Highway and widening of the North-South Highway from Yong Peng to Senai Utara.

• Transport Infrastructure: Projects like the Sarawak-Sabah Link Road II, Sabah Pan Borneo Highway Phase 1B, Penang International Airport expansion, and the redevelopment of Sultan Abdul Aziz Shah Airport, Subang.

• Road Improvements: Upgrading key roads, including the East-West Highway from Gerik, Perak, to Jeli, Kelantan, and the road from Tanah Rata to Kea Farm in Cameron Highlands.

As the focus shift towards the East Coast and East Malaysia, we believe that companies could reap rewards of potential economic ripple effects generated by the infrastructure enhancements along the ECRL route, which are garnering interest for industrial development. Additionally, with Indonesia's capital relocation to Kalimantan on the horizon, Sabah and Sarawak stand poised to benefit from the shifting geopolitical landscape, making robust infrastructure frameworks a vital catalyst in achieving this vision. Furthermore, given that Johor Bahru–Singapore Rapid Transit System (RTS) railway project is at 36% completion and with data center segment booming in the region, coupled with the development of Forest City's financial zone, this promises growth opportunities and may expedite the realization of the HSR.

The execution of the recently unveiled NIMP 2030 is expected to require a substantial investment of approximately RM95bn over the next 7-years to 2030. We deem that this initiative is set to have a positive spillover effect on construction sector as the expansion of data centers stands to particularly benefit from this development. Malaysia's attractiveness as a data center hub is bolstered by the presence of major cloud service providers like Alibaba, Microsoft, Amazon Web Services, and Google Cloud. Additionally, with Singapore facing resource constraints, Johor emerges as an appealing alternative, with projections of attracting RM17bn in investments by 2024, representing 3.2% of the nation's total data center facilities.

Additionally, in line with the NETR, there is also a growing focus on renewable energy. Hence, we reckon that SunCon's successful acquisition of a substantial RM1.7bn data center project in Johor's Sedenak Tech Park (STeP) and their participation in the Corporate Green Power Programme (CGPP), position the company favourably to capitalize on opportunities in these thriving segments.

We have OVERWEIGHT rating on construction sector as we anticipate to see a boost of more announcements on construction projects, as the sector will be driven by the forecast RM90bn allocations for DE in 2024. Nevertheless, the formulation of the Government Procurement Act could potentially prolong tendering awards and cause project delays, as observed in several key projects like the East Coast Rail Link (ECRL), Light Rail Transit 3 (LRT3), and MRT3. Despite all, those low-hanging fruits projects would be main drivers for strong contender with substantial orderbook namely Gamuda (BUY, TP: RM5.16) and SunCon (BUY, TP:RM1.99).
 

Source: BIMB Securities Research - 2 Oct 2023