• Maintain OVERWEIGHT. Top Picks include Gamuda, Sunway Construction, and Kerjaya Prospek. We remain upbeat on the slew of infrastructure jobs related to highways, industrial hubs, and flood mitigation works highlighted in Budget 2025. Our early assessment on contractors like Sunway Construction indicates that the latest labour reforms – ie higher minimum wage of MYR1,700 (from MYR1,500), foreign worker contribution to the Employees Provident Fund (EPF), and the multi-tiered foreign worker levy (MTLFWL) to have limited earnings impact for FY25F (1.7%-1.8%) (Figure 8).
   
• A higher monthly minimum wage of MYR1,700 from MYR1,500 will take effect from 1 Feb 2025. We gathered that major contractors such as Gamuda, Sunway Construction, and IJM Corp have pretty much been paying most or all construction workers, especially skilled workers (on their payrolls), above MYR1,700. We even gathered that the daily pay for general construction workers (that can be on a subcontract basis) is between MYR80 and MYR100. Taking the mid-point of MYR90 for the daily wage of a 22 working days-a-month period, the monthly pay surpasses the MYR1,700 floor. Therefore, this is not much of a concern for contractors. However, we flag the risk of a possible cascading upwards effect whereby workers already paid the minimum wage or higher may demand a pay raise to address the smaller gap.

• MTFWL to begin early next year. While no details were disclosed under Budget 2025 in regard to the MTFWL – we base our hypothetical earnings impact on multi-tiered levy rates proposed for 2021 from the Institute of Labour Market Information and Analysis. Our preliminary estimates find that earnings of contractors like SCGB will be reduced by <1% (Figure 5 and 6).

• EPF contribution by foreign workers. The Government also plans to make it compulsory for all non-citizen workers to contribute to the Employees Provident Fund (EPF) (to be implemented in phases). We view this could be a disincentive for such workers to come to Malaysia. Assuming the contribution is 11%, workers (under new contracts) would be taking home only MYR1,513 from the revised MYR1,700 minimum wage. In addition, contractors would have to contribute EPF for workers, which is currently 12% or 13% for wages below MYR5,000 per month (Figure 1).

• If employers intend to ensure the foreign workers’ take-home pay remains at the minimum monthly wage of MYR1,700 post EPF contribution – employers would need to pay an addition MYR210 on top of the employers’ EPF contribution of MYR248 for new hires (Figure 2). That being said, the percentage of contribution of existing contracts of employment is proposed at 2% but to be gradually increased to be on par with the contribution of Malaysian employees within six years.

• All in, we view such labour-related measures to increase adoption of industrialised building systems which stood at 84% and 60% for Government and private projects in 2021. Key risks: Delay in project rollouts, unexpected spike in building material costs, and unforeseen hurdles in hiring foreign workers.

Source: RHB Research - 21 Oct 2024