By Xavier Kong
The construction sector has always been a vital part of a nation’s growth, with Malaysia being no exception. With the contents of the 11th Malaysia Plan, is the sector being used as a catalyst to achieve economic targets by 2020?
Sector background: The construction sector functions as an economic engine for Malaysia. Though relatively small, it is well linked to other parts of the economy, particularly related industries such as basic metal products and electrical machineries. Thus, the sector serves as a multiplier for other industries.
While it is currently contributing 4.6% of the country’s gross domestic product (GDP), it is estimated that the construction sector can potentially push its contribution up to 5.5% by the end of 2020.
The recent 11th Malaysia Plan (11MP) announcement revealed a planned expenditure of about RM260 billion for the construction sector, with a large number of high-impact or high-priority projects.
The plan, tabled on May 21, 2015, showed that most of the major construction projects are of high impact or high priority, with a total estimated value of RM142 billion for these projects. The construction sector is set to be a major beneficiary as the government expenditure will help to drive the sector.
What analysts think: Analysts are mostly positive about what the 11MP could mean for the construction sector, considering the expenditure for the sector is 13% higher at RM260 billion from the RM230 billion allocation for the 10th Malaysia Plan. The government estimates a growth of about 10% for the sector in the next five years.
Other than rail and transport projects, the focus was also placed on new highway projects outside of the Klang Valley, as well as five new power plants planned with a combined capacity of 7,626 megawatts.
AmResearch expects more building opportunities, such as affordable housing programmes as well as mega developments, though the research house noted that the competition will be intense, and it is difficult to identify the beneficiaries for these future deals for now.
The list of priority projects was also within the expectations of CIMB Investment Bank (CIMB IB), though a surprise was the RM8 billion continuation of the Gemas-Johor Bahru double-tracking project, which had stalled over a year ago to make way for the High-Speed Rail (HSR) project. Nevertheless, CIMB IB also expressed its disappointment over the lack of a new timeline for the HSR.
On the other hand, TA Securities has maintained its “underweight” call on the sector, saying that the projects mentioned were more of a reiteration of pipeline projects that had very much been anticipated by the market, except for the regional sewage treatment plant and sewer line in Perak, which is estimated to cost RM2 billion.
TA also noted that, while the Pan Borneo Highway and the Central Spine Road are both sizable projects, both are expected to be carried out in packages over a long period of time, and are likely to take more than a decade to be completed. TA also highlighted that the Central Spine Road is a continuation of an initiative highlighted back in the Eighth Malaysia Plan, between 2000 and 2005.
Peer comparison:
Click to enlarge
Stockstalk: Overall, the commitment to spend RM260 billion is a big step by the government. Considering this is the last five-year stretch towards 2020, it has been regarded by some quarters as 11th hour measures to boost the country’s income per capita to the required level.
Malaysia’s gross national income (GNI) per capita stands at US$10,196 in 2015. On the other hand, the requirement to become a high-income economy is for the GNI per capita to hit US$15,690.
The construction sector is expected to aid the tall order in realising the target of becoming a high-income economy, and it shows in the reviving projects such as the double-tracking project and the Central Spine Road.
This means that for the construction sector, there will be contractors looking for tenders, which in turn helps to drive the sector. The RM260 billion — an increase from 10MP — would definitely help the margins of contract winners, along with the upgrading of public transport remaining a focus, the sector will receive good longer-term visibility, as well as order book growth prospects.
On the other hand, a number of the projects declared in the 11MP are without a set timeline, and this takes away some of the positives which the RM260 billion brings to the sector, as it casts uncertainty on the projects, as well as causes worries that the projects may be delayed.
Early winners in the construction sector would be the likes of Gamuda Bhd, Muhibbah Engineering, IJM Corp, as well as Sunway Bhd, given the progress which they have already made for both RM25 billion Mass Rapid Transit Line 2 and RM9 billion Light Rail Transit 3 projects.
______________________________________________________________________
Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell any stocks. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
You must be logged in to post a comment.