Yesterday, the Works Minister told the Dewan Rakyat that the government will be looking to roll out the Pan Borneo Highway (PBH) Sabah project in 1Q20. In Macquarie Equities Research’s (MQ Research) report today (Tuesday, 15 Oct), while this is a positive start, MQ Research thinks that more awards are needed to uplift the construction sector and create job opportunities. MQ Research is heavyweight on the construction sector, with Gamuda as its top pick in the big cap space.

Event

• In a statement made by the Works Minister, Baru Bian, the government is looking to roll out the PBH Sabah project in 1Q20. The awards, which consist of package 28-30, will cover a total distance of 60km and will cost around RM980mn. MQ Research understands that there are 35 packages in total under PBH Sabah. Each package could fetch a value of between RM200mn to RM400mn. To date, 12 packages have already been awarded and the Minister added that the remaining 20 packages (post-awards of Package 28-30) will be awarded after the launch of the 12th Malaysia Plan in mid-2020. The awards could be carried out between the year 2020 and 2025.

Impact

• Positive start, but more awards needed to uplift the sector. While MQ Research is positive on the announcement, the staggered award approach by the government could prove to be insufficient to uplift the sector and create job opportunities. As seen in the awards of the Pan Borneo Highway Sarawak previously, under the previous government, the awards of approximately RM16bn packages happen within six months’ time – and construction commenced swiftly afterwards. If there is only RM980mn worth of contract to be awarded, the competition will be stiff as both contractors from East and West Malaysia will compete for a package there. Since the PBH project will only hire local labourers, this approach will also bring minimal job creation to Sabah.

• AQRS and Econpile are MQ Research’s top picks for this project. Before the project was suspended during the change of government last year, AQRS who partners Suria Capital (Sabah state GLC) in this project, were shortlisted in four different packages of PBH Sabah. The total amount of the mentioned packages are close to RM2bn. Given AQRS’ strong partnership with a prominent local Sabahan player, MQ Research believes AQRS could be in pole position to secure multiple packages from this project. AQRS’ piling partner – Econpile could eventually benefit from this project as all of existing piling works in AQRS’ orderbook, were sub-contracted to Econpile.

• AQRS getting a second bite of the cherry with its associate company - Sedco Precast. AQRS owns a 49% stake in Sedco Precast, the largest precast company in Sabah. Sedco was already awarded the contract to supply precast products to the PBH project, but after MQ Research’s checks with the company, management said that impact of PBH is not fully filtering through its earnings yet and PBH’s precast orders now are still small. However management believes that once all of the 35 packages are awarded and construction moving at full swing – the impact on earnings from PBH’s precast orders will be more prominent.

Outlook

• MQ Research has an overweight call on the sector with Gamuda being its top pick in Malaysia Construction in the big cap space. MQ Research believes cabinet’s approval to acquire its toll-road concessions could pave the way for Gamuda to kick off the Penang Transport Master Plan (PTMP) project. In the small-mid cap space, MQ Research likes AQRS, HSS and Econpile.

Source: Macquarie Research - 15 Oct 2019