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PETALING JAYA: Construction and infrastructure development command the highest multiplier effect in any economy and in most cases, it is the government’s ultimate tool to pump prime the economy.
The mega projects are all there, but there are no major catalysts to trigger any meaningful movements yet as Putrajaya channels its fiscal strength on stimulus packages to assist people and businesses that were affected by the Covid-19 pandemic.
The Bursa Malaysia Construction Index has declined about 11% year-to-date and has been hovering around the 160-point mark, way below the pre-pandemic levels at about 200 points.
Investors have been watching the construction sector from a safe distance due to the uncertainties of an economic recovery and the timeline of project rollouts.
Like most sectors whose recoveries are underpinned by the vaccination rates, it is all the more important for the construction industry, which has seen its performance dwindling since 2018 due to the lack of clarity in terms of the rollout of infrastructure projects.
Rakuten Trade head of equity sales Vincent Lau said investors can expect better news and deal flows in the second half once more states move into the second or subsequent phases of the National Recovery Plan (NRP) and when the Parliament reconvenes.
Rakuten's Vincent Lau: “We won’t see earnings recovery anytime soon but at least the awarding of jobs will be good to turn around the sentiment for the construction sector. The economy is just waiting for contracts and announcements to be unleashed, so to speak.”
“It is a good thing that our vaccination rate is being ramped up and once all these are in place, news and deal flows would definitely start kicking in again.
“We won’t see earnings recovery anytime soon but at least the awarding of jobs will be good to turn around the sentiment for the construction sector. The economy is just waiting for contracts and announcements to be unleashed, so to speak, ” he said.
Public Invest Research said contractors are now expecting to receive a string of orders in the second half of 2021, owing to a pick-up in construction activities post-movement control order (MCO).
“Nevertheless, given the high Covid-19 cases this year, coupled with multiple rounds of MCOs, we foresee government allocation to the development sector this year amounting to RM68.2bil not likely to be utilised fully.
“This is because the allocation could be re-prioritised toward the most directly-affected sectors as well as the implementation of measures to help the people displaced by the pandemic.
“We are of the view that public investment will be more meaningful in 2022 amid a stronger pick-up in global economic conditions and higher crude oil prices, ” it said in a sector update report yesterday.
It added that the bulk of the amount has been set aside for accelerating ongoing impactful public infrastructure projects, primarily for transport and connectivity such as the east coast rail link, mass rapid transit 2 (MRT 2), light rail transit 3 (LRT 3), as well as Pan Borneo highway in Sabah and Sarawak, and coastal highways in Sarawak.
MRT2 construction
Public Invest said mega projects are likely to be re-introduced by the government to pump-prime the economy, hence all eyes are on the 12th Malaysia Plan (12MP) with an implementation period of 2021 to 2025.
“We foresee the likelihood that a revised version of the MRT 3 project, a RM3.2bil JB-Singapore rapid transit system (RTS), the ongoing feasibility studies on the alternative KL-JB high-speed rail line, Penang transport master plan (PTMP) and Serendah-Port Klang rail bypass project could probably be included in the 12MP though funding options could be varied, ” it said.
It added that some projects such as the MRT 3, RTS and PTMP have been given the go-ahead to proceed, hence they are expected to be included in Budget 2022 as well.
Given the government’s fiscal constraints, the research house said the implementation of these projects may fall under a private finance initiative (PFI) and public-private partnership (PPP), of which the main contractor may be required to participate in the funding.
Maintaining its “neutral” rating on the sector, Public Invest said the local political landscape remains dynamic, raising uncertainties on the timing of implementation.
The research house also reckoned that the earnings prospects of contractors will remain challenging this year, with recovery only likely in 2022.
It, however, said that order books for most construction companies are relatively healthy, with earnings visibility for the next three years.
Public Invest pointed out that bottom lines are subject to higher operating cost, as raw material prices have spiked including for steel bar and copper, in addition to pandemic-related costs, while efficiency levels are expected to remain low due to the restrictions in place.
In a recent second-half outlook report, MIDF Research said construction is a sector waiting to be re-energised, poised for a positive trajectory in view of the existing mega projects like LRT3 and MRT2 approaching their prime stage and possibly accelerated construction work progress that could help in achieving higher progress billings.
It said the potential positive news flow on the12MP, the details, timeline and implementation models of mega public infrastructure projects such as MRT3 will be an exciting sectoral development that favours local contractors with extensive experience in railway and road projects, a healthy track record and strong balance sheet.