News

• No development expenditure cut. Prime Minister Najib Tun Razak yesterday tabled the revised Budget 2015 in view of falling crude oil prices (Brent declined 48% since midJune 2014). While operating expenditure will be cut by RM5.5bn, development expenditure will be maintained at RM48.5bn, unchanged from original Budget 2015 tabled in Oct last year.

Comments

• Previous concerns… There were initially concerns that the government may scale back on development expenditure due to falling crude oil price (refer to our sector report “Spillover from lower oil price” dated 3 Dec 2014).
• ...have now subsided. The unchanged development expenditure should assuage concerns regarding the fear of a slowdown in contract flows. At RM48.5bn, this would mark a strong 15% YoY development expenditure growth for 2015. This is significant considering that the YoY changes from 2011 to 2014 only ranged 1% to -12%. Nominal construction GDP should grow strongly given the strong 81% correlation with development expenditure.
• Mega projects still on. It was reiterated that mega projects such as the MRT Line 2, LRT 3, High Speed Rail and Pan Borneo Highway would go on. We previously argued that the bulk of these mega projects were unlikely to be adversely impacted as they were mostly implemented off the government’s balance sheet to begin with.
• Post flood rebuilding. Following the aftermath of the recent flood tragedy, an allocation of RM800m will be provided for the rebuilding of basic infra and RM893m to implement flood mitigation projects. We expect this to be one of the contract flow drivers this year.
• 11MP is the next catalyst. It was also mentioned that the 11MP (2016-2020) will be unveiled in May. Arguably, this may be the most important Malaysia Plan as 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

• The reassurance of no development expenditure cut should remove concerns on slowdown in contract flows. We retain our OVERWEIGHT rating premised on 3 themes: (i) strong surge in development expenditure; (ii) roll out of mega projects; and (iii) introduction of the 11MP.

Top Picks

• Large cap: Gamuda (BUY, TP: RM 5.67) 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 (BUY, TP: RM 1.52)  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 - 21 Jan 2015