Announced by the Prime Minister yesterday, the 12th Malaysia Plan (12MP) which sets the trajectory for the local construction landscape is underwhelming for contractors under our coverage. While development expenditure (DEVEX) allocation for 2021-2025 is massive at RM400b (+54% against 11MP’s RM260b), priority was not placed towards new mega infrastructure projects. Key projects mentioned were either continuation of existing projects or reiteration of previously planned projects i.e. Gemas-JB Electrified Double Track, KVDT, ECRL, RTS, Pan Borneo, Central Spine Road and Kota Bharu – Kuala Krai Highway. On a separate note, we find the high DEVEX allocations (an average of RM80b/annum; note FY21 DEVEX was only RM68b) a stretch given that the government is also focusing on fiscal consolidation. All in, we believe the governments’ weaker fiscal position post pandemic would mean: (i) slower roll-out of projects, (ii) smaller quantum or spaced-out contracts, and (iii) a higher reliance of PFI funding from contractors. Consequently, we lower our construction valuations ascribed towards key infrastructure players under our coverage i.e. Gamuda and IJM. Hence, we downgrade the sector to NEUTRAL (from OVERWEIGHT).

12th Malaysia Plan announced. Yesterday, the government announced the 12th Malaysia Plan (12MP) roll-out which would pave the roadmap for the nation’s medium-term developments. While headline development expenditure (DEVEX) of RM400b is huge, based on our read-through for the construction sector, we find the plan underwhelming for most contractors under our coverage as prospects for mega infrastructure projects for the upcoming years would be minimal with the focus being on delivering existing projects and implementing previously planned ones i.e. Gemas-JB Electrified Double Track, KVDT Phase 1, ECRL, RTS, Pan Borneo, Central Spine Road and Kota Bharu – Kuala Krai Highway.

Focus will be on rural developments to reduce the gap among states. According to the plan, the government will be prioritising less developed states and have earmarked 50% of development expenditure (DEVEX) towards six key rural states namely Kedah, Kelantan, Perlis, Sabah, Sarawak and Terengganu. Key projects to be implemented include construction of schools, hospitals, roads and industrial areas. We believe such measures and projects would generally benefit the smaller sized contractors. Contractors under our coverage which would benefit from these implementations are HSL and Kimlun.

Other key mentions from the 12MP includes: (i) continued push for affordable homes, (ii) further development of the water infrastructure space, and (iii) introduction of incentives to encourage higher usage of construction technology such as industrialised building systems (IBS), Building information Modelling (BIM) and modular construction which would reduce labour requirements.

Meanwhile, there are no new plans for Bandar Malaysia. To recap, MoF and IWH-CREC has agreed to terminate the multi billion ringgit Bandar Malaysia land deal back in July 2021. Within the 12MP, there was only a brief mention of Bandar Malaysia being an international business hub to provide job opportunities for local talents and promote the Malaysian brand. However, no further elaboration on the methods of implementation was revealed. We believe this development would likely continue to idle without the initially planned High Speed Rail (HSR) passing through it.

Fiscal constraints limit large scale implementations. In view of the tighter fiscal space resulting from the multiple assistance packages announced (total direct injection of c.RM81b since the start of the pandemic) coupled with future assistance to revive the economy, we believe implementation of projects would likely (i) see a slower roll-out, (ii) be smaller in quantum or in phases and (iii) be more reliant on contractors’ balance sheet for funding i.e. PPP/PFI. We believe such scenarios are less market friendly. Based on our in-house projections, the Federal government would hit a debt to GDP ratio of 64.5% by year-end – above the statutory ceiling level of 60%.

MRT3 might need higher private funding assistance. Based on our latest understanding back in April 2021, 10-30% of MRT3’s funding needs would be funded by the private sector to alleviate the country’s fiscal burden. However, given the protracted recovery from Covid-19 since then; we believe the current fiscal space is less accommodative and we do not discount the possibility that higher private funding needs (>30%) is required in order to expedite the commencement of MRT3. Our estimated cost for MRT3 is c.RM32.9b.

YTD, contractors’ replenishment has been decent with most inline to meet our revised replenishment targets (revised upon FMCO implementations). However, compared against the initial targets set out by management at the start of the year, replenishments are running behind management guidance due to the numerous MCOs which deferred contract roll-outs. Consequent to these, outstanding orderbook of contractors under our coverage have been declining YoY since FY18 (refer table). Moving into FY22, we opined that contract roll-outs will be gradual instead of a strong rebound.

Source: Kenanga Research - 28 Sept 2021