Can Malaysia revive its weakening construction sector?

It has resumed its shelved mega projects.

Amidst the backlash of perceived “less-friendly business policies”, Malaysia’s government has taken a step back and revived two shelved legacy mega projects in an attempt to bring back life into its sluggish construction sector, UOB Kay Hian (UOBKH) revealed in a report.

Whilst some construction stocks recorded commendable earnings in Q1 2019 thanks to billings recognitions and sustained margins, others were not as lucky and saw profits falling below expectations. UOBKH noted how Gabungan AQRS (GAQRS) saw lower property sales and progress billings, whilst Ekovest reported slower billings from its construction order book and unbilled sales. WCT’s earnings were also dragged by sluggish property sales and high borrowing costs.

The authorities have given the go signal to resume works on the East Coast Rail Link (ECRL) and the mixed-use, transit-oriented development (TOD) Bandar Malaysia projects. They were initially put on hold due to strict policies which limited expansion.

Tender contracts for ECRL are expected to be dispensed in phases around the end of Q3 2019. Meanwhile, Bandar Malaysia’s newsflow is set to intensify from Q4 2019 as the joint venture between Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (CREC), the IWH:CREC JV, is in the midst of finalising terms with the government.

“We view the resumption of ECRL and Bandar Malaysia signifies Malaysia is a key integral player in China’s Belt Road and Initiatives (BRI), which would further strengthen the relationship between these two countries, in addition to tapping and exploiting the multiplier effect along the BRI value chain,” UOBKH analysts Farhan Ridzwan and Abdul Hadi Abdul Manaf said.

Should the ECRL or PBHS commence construction works and begin to award fresh contracts, this would spark a mild re-rating for the sector, particularly for turnkey contractors and subcontractors, so and so added.

The federal government is also expected to resume other domestic projects, including Budget 2019-approved Klang Valley Double Track Phase 2 (KVDT-2) and Pan Borneo Highway Sabah (PBHS).

The analysts also highlighted how the re-tendering process for the Kuala Lumpur- Singapore high-speed rail (HSR) has begun (RFP for technical advisory consultancy), whilst the LRT3 is also expected to be in full swing in H2 2019.

“Over in Sarawak, contracts for projects such as the Coastal Road and Trunk Road (US$1.5b) and the Water Grid (US$435m) are expected to be progressively dished out in the run-up to the Sarawak state elections slated in 2021,” they said.

Meanwhile, the government has announced plans to reform the water industry via the water tariff revision nationwide in a move to reduce non-revenue water (NRW) and improve water reserve margin (WRM).

On the federal level, US$203m has been allocated for the National NRW Reduction exercise which focuses on pipe replacement. Separately, water supplier Air Selangor has set aside about RM30b capex for the next 30 years to improve the water service system in the state while RM2.8b has been allocated for the Sarawak Water Supply Grid Programme

Currently, ongoing billing recognition are expected to sustain earnings in the coming quarters with new contracts from the rollout of mega projects to be dished out from H2 2019.