KUCHING: The construction sector as well as the building materials industry are expected to be the most affected by the change in Malaysia’s government as new initiatives promised by Pakatan Harapan (PH) could interrupt the continuity of major infrastructure projects.
In a report, RHB Research Sdn Bhd (RHB Research) highlighted that with a change in the Federal Government, it is more cautious on the construction sector as the continuity of major infrastructure projects becomes uncertain.
“The event is unprecedented, and the extent of the impact the industry would feel within the short term is hard to predict, at this point in time,” it opined.
Of note, under PH’s manifesto, it promised to initiate a comprehensive review of all mega projects awarded to foreign contractors within 100 days of coming to power.
“Two large-scale public projects come to mind – the ECRL awarded to China Communications Construction Company (CCCC) and Gemas-JB double-track rail project awarded to China Railway Construction Corp (CRCC), China Railway Engineering Corp (CREC) and CCCC.
“Local companies that have benefitted for these projects include YTL, Lafarge Cement and HSS Engineers. It is highly probable that the progress of these projects would be halted, as a review takes place, causing the companies involved to be unable to carry out further works affecting progress billings,” RHB Research said.
The only project that is off the reform agenda is the Pan Borneo Highway project for both Sarawak and Sabah’s league which PH has pledged that it would prioritise the completion of the two highways.
RHB Research pointed out that PH’s promise to abolish of tolls in stages providing fair compensation to affected companies could result in a one-off cash injection following the disposal of toll concession assets which comes at the expense of earnings from the collection of tolls.
“The proceeds, which could be used to pare down debts, may just give rise to special dividends to shareholders. This would be largely neutral on stocks – provided that fair compensation is given.
“Stocks in focus include Gamuda, IJM, Ekovest, MRCB, Taliworks, Litrak, WCE Holdings and Ahmad Zaki Resources,” it added.
It also pointed out that PH will be reforming the public procurement system for project tenders.
It said, “This would be negative for companies that rely on relationships/direct negotiations, and benefit companies that have the technical capabilities, track record for execution, and are cost-competitive. Gamuda, IJM, Sunway Construction (Suncon) and WCT are among companies that have done well in open tender projects.”
Meanwhile, CIMB Investment Bank Bhd’s research arm (CIMB) viewed that although it remained too early to assess the actual impact on construction contracts (new and ongoing) under PH, its manifesto, if put into effect, would pose uncertainties on the outlook of job flows, cause delay risks to all the high economic impact contracts which have crossed critical stages of approvals and tenders, and cast a negative sentiment on the sector.
“Our view is that a review of all mega projects and a reform on the existing construction tender and procurement process could, at the very least, result in contract delays,” it opined.
It pointed out that there could be downside risks to contractors’ order book replenishment across the board.
“Year to date, several high-economic impact projects have crossed the critical stage of approvals with most in the execution stage.
This is particularly so for the RM55 billion ECRL – 13 per cent completed, and the RM50 billion to RM60 billion KL-Singapore HSR – awarded two project delivery partner (PDP) contracts worth a combined RM30 billion to RM40 billion.
“The RM40 billion to RM45 billion MRT 3 (Circle Line) and RM12.9 billion Gemas-JB rail double tracking have been approved but not officially awarded.
“Overall, the continuity of contract awards could be affected,” it opined.
All in, CIMB Research said, the overall sentiment on the sector could also deteriorate.
“Using the anecdotal example of 2008 (the 12th General Election) when selected mega contracts were cancelled, deferred, or reviewed, we highlighted that three months prior to GE12, the KLCON Index de-rated 16 per cent and declined a further 13 per cent in the three months post-GE12.
“In all likelihood, there could be more downside to KLCON Index’s 11 per cent decline YTD,” it said.