News

• Lower oil price hits coffers. Last Friday, Petronas CEO Tan Sri Shamsul guided that its contribution to the government (dividend, tax & royalty) will be cut by 37% to RM43bn, representing a potential shortfall of RM25bn.

Comments

• Development expenditure risk. While the recent floating of fuel prices could potentially yield subsidy savings of RM12bn, the government may still struggle to achieve its fiscal deficit target of 3% of GDP. Should crude oil price remain weak throughout 2015, our economist believes there is risk that development expenditure may be reduced, which was originally budgeted to grow strongly by 15% to RM48.5bn in 2015.
• Negative for construction… At first glance, the risk of a potential spending cut appears to be negative for construction given the strong 81% correlation between nominal construction output and development expenditure.
• …but not that drastic. Although the spending cut is a valid concern, we do not expect the reduction to be very drastic. In the event of a reduction (if any), our economist still projects development expenditure to increase YoY, albeit at a slower pace of 7.8% to RM45.5bn. This would be 6.2% lower than what was initially targeted in Budget 2015.
• Mega projects mostly “off balance sheet”. We reckon that the potential development expenditure cut will not adversely impact the rollout of mega projects as they are mostly carried out of the government’s balance sheet. For example, the MRT is undertaken by MRT Corp, the LRT extension and Line 3 by Prasarana, Warisan Merdeka by PNB, Kwasa Damansara by EPF and TRX by 1MDB. The various proposed highways such as WCE, SUKE, DASH and KIDEX on the other hand are all implemented via a build-operate and transfer (BOT) basis.
• Next year’s catalyst: 11MP. The key catalyst for next year would be the unveiling of the 11MP (2016-2020) in May. This, we believe, will be the most critical Malaysia Plan as it ends in 2020, the target timeline to achieve a “high income nation” status. Similar to past plans, we expect some excitement for construction.

Rating

OVERWEIGHT

• While there is risk of a cut in development expenditure, we do not expect a significant magnitude (if any) nor should it pose an adverse impact to the sector as it is still expected to grow YoY albeit at a slower pace.
• Maintain OVERWEIGHT premised on 2 themes: (i) the roll out of mega projects and (ii) unveiling of the 11MP.

Top Picks

• Large cap: Gamuda as it is the best proxy to the MRT play. Key catalysts are the roll out of the SSP line and resolution to the Selangor water saga.
• Small cap: Mitrajaya which is backed by a sizable construction order book cover of 7x and growing property contribution. The market has also overlooked the value of its landbank.

Source: Hong Leong Investment Bank Research - 3 Dec 2014