• Notwithstanding the transition into endemicity, the construction sector’s medium-term earnings trajectory may be somewhat held back by margin pressures arising from an inflationary building materials cost environment and manpower shortages. The Government projects the construction sector’s output to rebound by 11.5% YoY in 2022, but this comes off a low base, as 2021 industry output contracted 5.2% YoY. Maintain NEUTRAL.

• Manpower and raw material costs prospects. Local contractors are expected to continue facing labour shortages even after border restrictions were eased on 1 Apr. The reason: Applications from employers will have to go through the Home Ministry’s evaluation committee to determine the number of foreign workers eligible for employment. As such, this could lead to a lack in manpower and result in construction work delays. Meanwhile, the monthly average price of raw materials is on the up, with steel bar prices spiking 21% YoY to reach MYR3,411.75/tonne in March, surpassing the peak of MYR3,255.00/tonne seen in Jul 2021. Contractors may resort to accordingly pricing in the increased input costs into new tenders, which may lead to higher working capital needs that could push financing requirements higher.

• Not everything appears to be smooth with public infrastructure projects. The disclosure of the Mass Rapid Transit Line 3 (MRT3) project details by the Government seems to have sparked some positivity in the market, as this project should keep contractors busy in the coming years. Nevertheless, the challenge lies in how the project will be funded – likely through a hybrid financing model being adopted in addition to the debt issuance by the Finance Ministry (MOF), whereby contractors will have to fund construction costs upfront amid the country’s limited fiscal headroom. Therefore, we cannot rule out the possibility of future mega projects being scaled down in terms of value or be financed via private funding initiatives.

• Possible overhang as the general election looms nearer. We foresee heightened volatility as we head closer to the upcoming general election – market talk believes the 15th General Election (GE15) could happen in 2H22. Based on the three previous general elections, the KLCON Index was found to have underperformed in the six months leading up to polling day.

• Top Picks. We continue to advocate names from the small- and mid-cap spaces like Kerjaya Prospek and MGB. Overall, we believe they have supportive catalysts to buffer near-term risks, supported by stable orderbook replenishment rates and robust balance sheets.

• Upside/downside risks to our sector call are shorter-/longer-than- expected delays in progress works, success/failure in securing new orders, and cheaper/higher raw material prices.

Source: RHB Research - 14 Apr 2022