The outlook for the Construction sector remains challenging as the federal government is reviewing ongoing infrastructure projects to reduce costs by 20-33%. Projects that could be affected include the Klang Valley MRT Line 2 (MRT2) and LRT Line 3 (LRT3), Pan Borneo Highway (PBH) and Gemas-Johor Bahru Electrified Double Tracking (EDT). There are opportunities in state government projects in Penang and Sarawak. Maintain our NEUTRAL call. Top BUYs are IJM, Suncon and HSS.

Potential MRT2 Cost Cuts

We gather that the MRT2 project could see a 25% reduction in cost to RM24bn from an initial estimate of RM32bn. The MMC Gamuda Joint Venture (JV) will be the most affected as it is the main contractor for the underground section and the Project Delivery Partner (PDP) for the aboveground section of the MRT2. Other listed contractors that could be affected due to ongoing work on above-ground packages secured include Ahmad Zaki, Gadang, George Kent, IJM Corp, MRCB, MTD ACPI, Mudajaya, SunCon, TRC, TSR and WCT. Since the cost reductions will come from the reduction in the scope of works, we believe only the contract values will be reduced while profit margins should be preserved.

LRT3 Costs to be Slashed

We gather that the LRT3 construction cost could be slashed to RM9-10bn from an initial estimate of RM15-16bn. The MRCB-George Kent JV will be most affected as the PDP for the project. We maintain our forecasts for MRCB as we believe we were conservative in our contract value assumption at RM9bn for the LRT3 despite the previous escalation in cost. Other contractors affected include AQRS, IJM Corp, SunCon and WCT.

State Government-financed Projects

The Penang and Sarawak state governments are looking to improve road and public transport infrastructure in their respective states. The Sarawak state government plans to complete the upgrading of the Coastal Highway and trunk roads at an estimated cost of RM11bn. Project pre-qualification bids have been called. Potential Sarawak beneficiaries are Cahya Mata Sarawak (CMS) and Hock Seng Lee (HSL). The Penang Transport Master Plan (PTMP) is pending approval by federal government authorities to be implemented and public feedback collection is ongoing. The Pan Island Link 1 (PIL1) highway and George Town-Bayan Lepas Airport LRT is estimated to cost RM16bn. The Gamuda-led SRS Consortium is the PDP for the project.

Maintain NEUTRAL Call

We reiterate our NEUTRAL call on the Construction sector as we remain cautious on the sector due to the risk of order book reductions with potential cost cuts for infrastructure projects. However, we believe the concerns are reflected in current share prices. Our top BUYs are IJM (large-cap), Suncon (mid-cap) and HSS (small-cap). Key upside risk is an acceleration in public infrastructure spending and the key downside risk is further cuts in spending.

Source: Affin Hwang Research - 4 Oct 2018