Tan Sri Muhyiddin Yassin was appointed as the new Prime Minister yesterday and is expected to form a new government under a new ruling coalition Perikatan Nasional with allies such as Gabungan Parti Sarawak (GPS). The sector is susceptible to changes in government policies and delays in public-sector project awards. The previous change in government saw the KLCON Index underperforming the FBM KLCI by 37% over a 1-month period. Maintain our UNDERWEIGHT call on the Construction Sector. Top BUYs are SunCon, AME and Taliworks. Top SELLs are Gamuda and MRCB.

Risk of Change in Government Policies

The elevated political uncertainties arising from the change in government and Prime Minister will continue to dampen sentiment on the Construction Sector. It is uncertain at this point if the open tender system to award publicsector projects practiced by the previous government will continue under the new government. The change in the Minister of Works could further delay the roll out of public-sector projects depending on the level of experience of the new Minister in this area and could lead to possible review of projects. But some construction companies with political links could benefit from the change in government, eg, Gabungan AQRS (BUY) and MRCB (SELL).

More Public-sector Projects in Johor Possibly

As a former Chief Minister of Johor and Member of Parliament for Pagoh, we believe new Prime Minister Tan Sri Muhyiddin Yassin could favour the implementation of projects in Johor to strengthen his voter base. Implementation of some infrastructure projects, such as the Johor Bus Rapid Transit and Johor Bahru-Singapore Rapid Transit System, could accelerate. Potential construction and concession company beneficiaries with operations in Johor include AME Elite Consortium (BUY), YTL Corp (HOLD), Kimlun Corporation (N-R) and Ranhill Utilities (N-R).

Delays in Infrastructure Projects in Penang Possibly

The implementation of the Penang Transport Master Plan (PTMP) could be adversely impacted by the change in government. Some components of the project, such as the Bayan Lepas LRT, relies on federal governmentguaranteed bonds to fund the construction. The Penang state government has become an opposition state and infrastructure spending for the state could be cut under the new government. Negative for Gamuda, which leads the SRS Consortium (PTMP Project Delivery Partner), if the project implementation is delayed due to lack of government support funds.

More Federal Government Funding for Sarawak Projects Possibly

The implementation of Sarawak-based projects could accelerate as Gabungan Parti Sarawak (GPS), which leads the state government, provided crucial support to Muhyiddin to become the new Prime Minister. Hence, there could be additional federal funding support for the development of infrastructure projects in Sarawak ahead of the next state election, which is due to be held by 7 September 2021. Potential beneficiaries are construction and building material suppliers such as Cahya Mata Sarawak (N-R), Sarawak Consolidated Industries (N-R), NAIM Holdings (N-R), Hock Seng Lee (N-R) and KKB Engineering (N-R).

Maintain Our UNDERWEIGHT Sector Call

We reiterate our UNDERWEIGHT call on the Construction Sector. SunCon remains our top sector BUY given its ability to secure in-house and privatesector projects and its being relatively less reliant on government jobs. Our small-cap top BUYs are AME (industrial properties continue to see good demand) and Taliworks (high dividend yield) among our small-cap top BUYs. Top SELLs are Gamuda and MRCB given uncertainties in winning new contracts.

Construction Stocks Underperformed Previously

We observe that the KL Construction Index (KLCON) typically underperformed the KLCI during previous periods of political uncertainty caused by changes in the Prime Minister or government. The KLCON underperformed the KLCI by 5- 7% over a 1-month period after the change in Prime Minister in 2003 and 2009. However, the KLCON underperformed the KLCI more severely, by 37%, following the change in government in 2008. Hence, the degree of underperformance for the KLCON could be as severe as 37% with the change in Prime Minister and the government.

Risk of Further Delays in Rolling Out Infrastructure Projects

The potential change in leadership or government could lead to further delays in rolling out infrastructure projects. Given the uncertainties, we downgrade the sector to an UNDERWEIGHT from Overweight previously.

Key Risks

Key upside risks to our negative view on the sector are (1) no change in government and leadership, easing political uncertainties; (2) acceleration in the award of government projects; and (3) major infrastructure projects are revived.

Source: Affin Hwang Research - 2 Mar 2020