PETALING JAYA: Future public infrastructure projects in the country could require more private sector participation, benefitting contractors with lean balance sheets, says RHB Research.
The research house in its latest construction sector report said, however, there was a risk of low private sector construction participation if the contractors experience funding limitations as they take up more projects.
“Private funding initiatives are the way forward.
“The government’s limited fiscal headroom is reflected in its debt-to-gross domestic product ratio, which stood at 62.4% as at end April (end December 2021: 63.4%),” said RHB Research.
The research house also foresees heightened volatility as the country approaches the 15th general election that could happen as early as the second half of 2022.
“Re-rating catalysts for the sector could arise after the election.
“Assuming the next government maintains policy continuity, this could bode well for ongoing and future project implementations,” added RHB Research.
However, a negative scenario would be a hung Parliament, which could fuel uncertainty for big-ticket public sector projects, going forward.
On the construction sector’s first-quarter (1Q22) performance, RHB Research said it was below expectations, with seven companies reporting numbers that disappointed, one that was in line with expectations and one that exceeded expectations.
“Construction revenue of certain companies did pick up in 1Q22 but was negated by higher raw material prices.
“Steel bar prices increased 16% year-on-year (y-o-y), while bulk cement prices were up 40% y-o-y in 1Q22.
“Consequently, we trimmed estimated financial year 2022 (FY22) and FY23 sector earnings by 1.3% and 2.5%, respectively,” said the research house.
However, RHB Research pointed out that improved human mobility resulted in a higher value of construction work done of RM29.5bil in 1Q22, representing a 7% quarter-on-quarter (q-o-q) expansion.
In the same period, the economic output of the construction sector grew 2.4% q-o-q to RM12.9bil, marking the second q-o-q expansion since 3Q21.
Notwithstanding this, headwinds in the form of escalating raw material prices and a persistent labour shortage continue to linger, adversely impacting construction progress and crimping profit margins.
The research unit said the latest data also continued to show the rise in the cost of materials, with monthly average prices for steel bars remaining high at RM3,360.25 per tonne in May, representing a 17% y-o-y growth.
As for the monthly average price of bulk cement, it grew by a staggering 67% y-o-y to reach RM336.50 per tonne in May.
“Therefore, contractors with government-related projects – which have variations in price clauses – are the ones that could see limited impact from the fluctuations in the price of materials,” said RHB Research.
Conversely, contractors involved in non-government projects can manage price headwinds by providing pricing under the current materials prices situation – they can then quote new prices to cover unexpected costs, including unforeseen increases in the price of materials needed.
Nevertheless, there could be imminently higher working capital needs that may weigh heavily on balance sheets, leading to higher financing requirements.
While workers are expected to come in batches in the coming months, contractors reiterated that the gap in labour supply may only be fully addressed by earliest, next year.
RHB Research has maintained its “neutral” call on the construction sector, and said it continues to advocate names from the small and mid-cap space like Kerjaya Prospek Group Bhd and MGB Bhd.
“Overall, we believe they have supportive catalysts to buffer near-term risks, supported by stable order book replenishment rates and robust balance sheets,” said the research unit.