• The discontinuation of the the KL-Singapore High Speed Rail (KL-SG HSR) project came as a surprise but the Malaysian government is studying the feasibility of building just the Malaysian portion.
• We believe the Klang Valley MRT Line 3 (MRT3) is a priority project to kick off in 2021, given the need to integrate the public transportation network and preserve local MRT construction expertise and equipment utilisation.
• We reiterate our NEUTRAL call on the Construction Sector. We downgraded Gamuda to HOLD from Buy recently as we believe the improving prospects are priced in. Top sector BUYs are Sunway Construction (SunCon), HSS and AME. Key downside risk for the sector is political uncertainties.

HSR project discontinued

The governments of Malaysia and Singapore announced that the HSR project will be discontinued after the KL-SG HSR agreement lapsed on 31 December 2020. The Malaysian government proposed several changes to the KL-SG HSR project in light of the Covid-19 pandemic impact on the Malaysian economy. Both goverments had conducted several discussions and had not been able to reach an agreement. Hence, both governments will initiate discussions to determine the amount of compensation. The Malaysian government will also undertake a detailed study to explore all possible options, including the viability of a domestic HSR project and its benefits to Malaysians.

Focus will likely shift to reviving MRT3

The discontinuation of the KL-SG HSR project will likely dampen sentiment on the construction stocks, especially those involved in the project previously such as Gamuda, MRCB, YTL Corp (HOLD) and HSS. We are concerned whether a domestic HSR project is feasible given the high cost of the project without the benefit of direct connection to Singapore and possible route duplication with the GemasJohor Bahru Double Tracking being built currently. However, we believe the government will continue with plans to implement the MRT3 project and include the project in the 12th Malaysia Plan 2021-25 (12MP) to be announced in January 2021.

Positive news priced in somewhat

We expect construction sector core earnings to contract 30% yoy in 2020 due to disruptions caused by the Covid-19 pandemic. Core earnings should rebound by 11% yoy in 2021E as progress billings accelerate to catch up on work schedules. We remain NEUTRAL on the sector. Prospects to replenish order books are improving with the potential revival of mega infrastructure projects such as the MRT3. But we believe the improving prospects have been priced in for the large-cap construction stocks such as Gamuda (HOLD), IJM Corp (HOLD) and MRCB (SELL) given the high PERs. Top sector BUYs are SunCon, HSS and AME. Key upside risk is the faster-than-expected roll-out of infrastructure projects and downside risk is political uncertainties dampening sentiment on the sector.

Source: Affin Hwang Research - 5 Jan 2021