• Latest trends of construction projects awarded. The total value of construction projects awarded in the country in 6M22 was MYR47.5bn – less than half of the full year value of construction projects awarded in 2021 (MYR129.6bn). Contract flows are likely to pick up in 4Q22, particularly for the Mass Rapid Transit 3 (MRT3) project. Nevertheless, we are cognisant of the risks in the form of elevated raw material prices and labour shortage that may crimp margins and impede recognition of progress billings. Maintain NEUTRAL on the sector.

• Labour shortage still requires some time to be resolved. The one-stop centre for foreign worker approvals has now been transferred to the Human Resources Ministry from the Home Ministry. Such a move could increase the efficiency in bringing in more foreign workers to the country. However, we note that the latest batch of foreign workers are mainly for the plantation sector. Henceforth, it could take a longer time for the construction sector to fill in the gap of the current labour shortage.

• Still too early to cheer on the slight easing in building material prices. The quantum of the MoM drop observed in building material prices such as steel bars and bulk cement were rather measurable – declining by only 6% and 2%. Therefore, it is still premature to conclude that there will be further drops in the months to come given the fluid environment. On average, the monthly average prices of steel bars and bulk cement remain 30-50% higher when compared to pre-pandemic levels.

• Private funding initiatives remain a key focus. The Government’s limited fiscal headroom is reflected in its debt-to-GDP ratio, which stood at 62% as at end Apr 2022 (end Dec 2021: 63.4%). As such, we cannot discount that future public infrastructure projects could require more private sector participation, benefitting contractors with lean balance sheets. However, there is a risk of low private sector construction participation if the contractors experience funding limitations as they take up more projects.

• KLCON Index likely to be in a lull ahead of elections. We foresee heightened volatility as we approach the 15th General Election (GE15) that could be called well before the end of the current Parliament’s 5-year term in mid-2023. Nevertheless, re-rating catalysts for the sector could arise after the general election. Assuming the next government maintains policy continuity, this could bode well for ongoing and future project implementations. A negative scenario would be a hung parliament, which could fuel uncertainty for big ticket public sector projects going forward.

• Top Picks. We continue to advocate names from the small and mid-cap space 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 - 12 Jul 2022