The Malaysian government is drawing up an economic stimulus package to counter the negative impact of the Covid-19 coronavirus outbreak on the domestic economy. We believe government spending will likely focus on helping the SME, manufacturing and tourism sectors affected by the outbreak. The government will likely accelerate the implementation of construction projects in 2H20 to support economic growth in view of external headwinds. We remain OVERWEIGHT the Construction Sector. Top BUYs are Gamuda, SunCon, AQRS and HSS.

Stimulus Unlikely to Focus on Construction Projects

The Ministry of Finance is getting feedback from various industries to determine the impact of the novel Covid-19 coronavirus outbreak on the domestic economy before initiating an economic stimulus package to boost growth. We believe the package will likely focus on helping the SME, manufacturing and tourism sectors that are most affected by the outbreak. The RM7.3bn economic stimulus announced in May 2003 to mitigate the adverse impact of the Severe Acute Respiratory Syndrome (SARS) outbreak focused on supporting private consumption, assisting SMEs and tourism-linked businesses. We believe there is limited scope to increase construction spending given the government’s fiscal deficit constraint.

Infrastructure Spending to Accelerate

Nevertheless, the increase in development expenditure allocation by 4% yoy to RM56bn in Budget 2020 and the revival of large-scale infrastructure projects are sufficient to stimulate the construction sector. We expect government development spending to accelerate in 2H20 instead of 1H20 as there have been delays in the award of public-sector contracts. The award of East Coast Rail Link (ECRL) works to Malaysian contractors has been delayed. We believe the government will accelerate infrastructure spending in 2020 to support economic growth, similar to prior years with economic stimulus packages to mitigate downturns in 2001, 2003, 2008 and 2009.

Large-scale Infrastructure Projects to be Revived

The Johor Bus Rapid Transit (BRT), Rail Transit System (RTS) and Pan Borneo Highway Sabah projects will likely kick off this year. Other largescale projects such as the Klang Valley MRT Line 3 (MRT3), Penang Transport Master Plan (PTMP) and KL-Singapore High Speed Rail (HSR) could see news flow on potential revival in 2020.

Remain Overweight the Construction Sector

We believe the positive news flow on the resumption in government infrastructure spending and stronger 4Q19 and 2020E sector core earnings growth will support an upward re-rating of the Construction Sector. We maintain our OVERWEIGHT call. Top BUYs are Gamuda, SunCon, AQRS and HSS. Other sector BUYs are AME Elite Consortium, Pintaras Jaya and Taliworks.

Source: Affin Hwang Research - 14 Feb 2020