PETALING JAYA: Most analysts are optimistic on the prospects of the construction sector this year, saying it is set for a “mini rebound” given the clarity on the sector moving forward and anticipation that the government would give the green light to resume some on-hold projects.
Last week, Prime Minister Tun Dr Mahathir Mohamad was quoted as saying that the East Coast Rail Link (ECRL) project could resume on a smaller scale if China agrees. The project was terminated last July.
The construction industry took a severe beating last year and the KL Construction Index fell almost 50% following the review of major infrastructure projects after the 14th general election (GE14).
Construction counters have declined between 25% and 60% since the May 9 election, with most of the stocks currently trading well below their fundamentally assessed trough valuations.
Rakuten Trade Sdn Bhd vice-president of research Vincent Lau told SunBiz that the current trough valuation may spring a surprise on the upside as the previously suspended projects could come back on stream, albeit on reduced contract value as the government seeks to be prudent in development spending.
MIDF Research analyst Muhammad Danial Abd Razak said that despite the cancellation and deferment of mega projects such as the high-speed rail (HSR) and the ECRL, the anticipated drag to the sector was less than initially thought.
While reviews of certain mega projects have put a strain on sentiment,
Muhammad Danial believes that the sector’s long-term outlook will be driven by sustainable measures.
“We are encouraged to see that meaningful allocations were secured, giving reasonable attention to residential, non-residential, social amenities and infrastructure developments.
“We expect construction works mainly for Mass Rapid Transit 2 (MRT2), Light Rail Transit 3 (LRT3) and Pan Borneo Highway (PBH) to pick up pace soon following the green light granted by the government to complete the projects,” he added.
Additionally, he said, in reference to Budget 2019, the amount of development expenditure spent at about RM50 billion was significant, which denotes positive sign on the near-term developments for the construction sector.
Despite significant cost reductions for both MRT2 and LRT3, the combined contract amount was still significant at RM41.5 billion, providing earnings visibility beyond calendar year 2020, he added.
Moving forward, Muhammad Danial sees the recovery in investors’ sentiment will be heavily weighted by the development potential in East Malaysia, but the pending implementation of mega projects especially in Sarawak will likely provide a boost on the state’s construction outlook.
The potential rollout of Sarawak infrastructure packages includes the coastal road, the second trunk road and the state’s water grid projects worth RM9.1 billion.
“Despite the near-term directional swing, we see the headroom is still ample for the sector to grow. This was mainly a recognition of stable development expenditure allocation in Budget 2019, continuation of mega projects such as LRT3, MRT2 and PBH, and pending implementation of infrastructure projects,” he noted.