Construction Sector Outlook Still Challenging
The outlook for the local construction sector remains challenging as the government is reviewing ongoing infrastructure projects to reduce costs by 20% to 33%, said Affin Hwang Capital.
Projects that could be affected include MRT2 and LRT3, Pan Borneo Highway and Gemas-Johor Baru double-tracking projects.
Affin Hwang Capital said MRT2 could see a 25% reduction in cost to RM24 billion from an initial estimate of RM32 billion. The MMC-Gamuda JV will be the most affected as it is the main contractor for the underground section and the project delivery partner (PDP) for the aboveground section of MRT2.
“Since the cost reductions will come from the reduction in the scope of works, we believe only the contract values will be reduced while profit margins should be preserved,” it said.
For LRT3, the construction cost could be slashed to RM9 billion to RM10 billion from an initial estimate of RM15-16 billion.
“The MRCB-George Kent JV will be most affected as the PDP for the project. We maintain our forecasts for MRCB as we believe we were conservative in our contract value assumption at RM9 billion for the LRT3 despite the previous escalation in cost. Other contractors affected include Gabungan AQRS Bhd, IJM Corp Bhd, Sunway Construction Group Bhd and WCT Holdings Bhd.”
Having said that, Affin Hwang Capital noted that there are opportunities in state government projects in Penang and Sarawak.
The Sarawak state government plans to complete the upgrading of the coastal highway and trunk roads at an estimated RM11 billion. Potential beneficiaries are Cahya Mata Sarawak Bhd and Hock Seng Lee Bhd.
Meanwhile, the Penang Transport Master Plan is pending approval by federal government authorities and public feedback collection is ongoing. The Pan Island Link 1 Highway and George Town-Bayan Lepas Airport LRT is estimated to cost RM16 billion. The Gamuda-led SRS Consortium is the PDP for the project.
Affin Hwang Capital is maintaining a “neutral” call on the construction sector due to the risk of order book reductions.
“However, we believe the concerns are reflected in current share prices. Our top buys are IJM Corp Bhd, Sunway Construction Group Bhd and HSS Engineers Bhd.”
Construction companies reported mixed results in Q2, with most seeing slower sales and progress billings due to general election uncertainties. However, construction earnings for most companies showed positive growth momentum.