PETALING JAYA: The construction sector could see margin compression in the medium-term due to an environment of high building material costs and manpower shortages.

       Raw materials prices made up 50% to 60% of the overall cost structure for the sector.

       RHB Research said contractors could resort to pricing in their increasing input costs into new tenders.

       “For previously won contracts, contractors may have to incur the rise in costs without being able to pass on the cost to other parties.

       “Conversely, construction companies blessed with strong cash positions may be able to negotiate with suppliers to obtain more favourable prices,” it said.

       In March, the average price of steel bars shot up 21% year-on-year to RM3,411.75 per tonne.

       The price of bulk cement had surged to a record high of RM307 per tonne, a level not seen since June 2015.

       RHB Research reckoned the local contractors would continue to face a shortatge of labour even after border restrictions were eased on April 1, as special quotas will no longer be given for the recruitment of foreign workers, as announced in January.

       “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,” it said.

       It added that the number of foreign workers has been on the downtrend between 2018 and 2021, registering a three-year annual compounded decline 18.2%.

       On the Mass Rapid Transit 3 (MRT3) Circle Line project, RHB Research said many public infrastructure projects are not as smooth sailing they appeared to be.

       It pointed out that while the disclosure of the MRT3 project details by the government seemed to have sparked some positivity in the market, the challenge lies on how the project would be funded.

       “It is likely through a hybrid financing model being adopted in addition to the debt issuance by the Finance Ministry, 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,” RHB Research said.

       The construction sector also faced a possible overhang as the general election looms.

       “We foresee heightened volatility as we head closer to the upcoming general election – speculation is rife that the 15th General Election could happen in the second half of 2022,” it added.

       RHB Research said over the past three general elections, the Bursa Malaysia construction index was found to have underperformed in the six months leading up to polling day.

       The research house maintained a “neutral” call on the construction sector as it saw limited rerating catalysts amid funding uncertainties over large-scale job tenders in the pipeline.

       “As such, we continue to recommend that investors be selective – casting a keener eye on companies with strong order books and balance sheets with diversified exposure across private and public jobs,” it said.