In the mid-term review of the 11th Malaysia Plan 2016-20 (11MP), the government has cut the development expenditure ceiling to RM220bn from RM260bn to consolidate its fiscal position. The annual construction-sector average growth rate is expected to moderate to 4.3% in 2018-20 from 7.1% in 2016-17 due to the slow property market and re-prioritising of major infrastructure projects. We reiterate our NEUTRAL call on the construction sector with IJM Corp, Sunway Construction (Suncon) and HSS Engineers as our top BUYs.

Ongoing Projects to Continue

The ongoing major infrastructure projects under 11MP will continue to be implemented, but costs will be rationalised for some of the projects. This will sustain the construction activities of contractors undertaking works for the Pan Borneo Highway (PBH), Klang Valley MRT Line 2 (MRT2), Light Rail Transit (LRT3), Gemas-Johor Bahru Double Tracking and four expressways in Klang Valley. It is also positive to note that the cut in the development expenditure (DE) budget under the 11MP was moderate with an average of RM44bn p.a. balance to be spent in 2018-20, compared to the average of RM43.5bn p.a. expended in 2016-17.

Focus on Improving Utilities and Public Services

The new government’s shift to prioritise inclusiveness in development will see higher allocation of DE to less-developed states and expanding public services and utilities. Improvement in water and wastewater services, electricity supply and flood mitigation, and the building of schools, hospitals and roads will be emphasised. IJM Corp and Suncon have been building private hospitals and will likely benefit under the open-tender system to award new government hospital contracts. Other potential beneficiaries are Ekovest and MRCB for flood mitigation projects; HSS, Taliworks, Salcon and Gamuda for water and wastewater projects.

Affordable Housing and Public Transport Emphasis

The government plans to build 200,000 affordable houses in 2018-20, to be spearheaded by the National Affordable Housing Council. The public transport modal share remains low at 21% in 2017 and the 40% target by 2020 may not be achievable. The major public transport project mentioned in the mid-term review that is yet to be implemented is the RM4bn Singapore-Johor Bahru Rapid Transit System (RTS). Potential contractor beneficiaries for rail projects include Gamuda, YTL Corp and IJM Corp.

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 cost cuts for infrastructure projects. We favour contractors that have been securing projects on an open-tender basis, which is the transparent process favoured by the new government. Our top BUYs are IJM (large-cap), Suncon (midcap) 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 - 19 Oct 2018