• Top Picks: Sunway Construction (SunCon) and Kerjaya Prospek (KPG). The rationalisation of Malaysia’s development expenditure (DE) remains a contention point. Our economics team sees limited possibility of significant tax policy reforms under the revised Budget 2023 to be re-tabled on 24 Feb. We think MRT Corp’s detailed study on the Mass Rapid Transit 3 (MRT3) project’s track alignment could potentially affect c.MYR34bn worth of civil works in the pipeline for contractors. Stay NEUTRAL.

• Expenditure deferment on the cards? According to the Finance Ministry’s economic reports, total 2021-2022 DE is c.MYR136bn – leaving c.MYR264bn for 2023-2025. The earlier tabled budget saw MYR95bn allocated for DE, inclusive of the c.MYR14bn earmarked to redeem 1Malaysia Development bonds, which translates to a c.MYR81bn core DE. We remain watchful of the DE figure, as the Government could scale down core DE to <MYR81bn (2022F: MYR71.8bn) in the absence of revenue collection methods, eg the Goods & Services Tax or GST. Nevertheless, the Government could still raise DE later in 2024-2025 to meet the MYR400bn planned expenditure under the 12th Malaysia Plan (12MP).

• Alternatively, private funding requirements for contractors could be tweaked higher to reduce the Government’s immediate capital outlay. Recall that MRT3 civil work package tenders required contractors to fund at least 10% of the job value for the first two years. If such requirements were to remain for future projects, contractors with lean balance sheets could initially see their financing headrooms strained, in our view.

• Borneo could see a higher revised allocation. The sizeable presence of the Borneo block in the Unity Government may likely lead to a higher revised DE for East Malaysia, which saw an initial allocation of MYR11.7bn (2022: MYR9.8bn) under the previous budget. The Government has given preliminary approval for an additional MYR1bn to upgrade Sabah and Sarawak’s border infrastructure. Notwithstanding this, we think the bulk of the allocation may flow towards private small-sized contractors.

• MRT3 rollout timeline. Based on MRT2’s timeline, the final nod by the Government was given two months after the 3-month public inspection (as per Section 84 of the Land Transport Act 2010). Therefore, assuming the MRT3’s detailed study is carried out now and ends around end-March, followed by a 3-month public inspection and a similar approval timeline for MRT2, we think MRT3 contract awards could be in September.

• We maintain NEUTRAL on the sector ahead of the Budget 2023 re-tabling with only MYR2.1bn jobs awarded in January (Jan 2022: MYR12.5bn). We reiterate KPG and SunCon as our sector Top Picks due to their diversification efforts in industrial-related jobs vs infrastructure and residential building works.

• Sector catalysts include a faster-than-expected rollout of MRT3 and potential bump-up in DE allocation in 2024-2025 by the Government to meet the MYR400bn planned DE under the 12MP.

Source: RHB Research - 15 Feb 2023