PETALING JAYA: Contractors should look to neighbouring Singapore and Sarawak for jobs, as a slowdown in award of contracts is expected in 2019, according to Hong Leong Investment Bank (HLIB).
The research house said in a note that contract flows are expected to slowdown on the back of slight year-on-year (y-o-y) decline of 0.4% in development expenditure to RM54.7 billion.
For the cumulative period of 12 months, domestic and foreign contract awards amounted to RM18.3 billion and RM406 million, representing a y-o-y decrease of 37% and 85% respectively. Contract flows continue to slow down after a brief rebound in Q3 18 as the government re-prioritised major infrastructure projects.
HLIB said foreign contracts (piling works) from Singapore amounted to RM148 million in Q4 18, which is an indication that civil infrastructure projects remain robust in Singapore. HLIB expect more domestic contractors to bid for foreign jobs especially in Singapore given its geographical proximity and the continued slowdown in the domestic construction landscape.
It expects contractors under its coverage such as Gamuda, Kimlun and Sunway Construction to compete for jobs there.
“We expect smallish basic infrastructure projects such as road upgrading, hospital, water, sewerage and rural area development projects will be rolled out by government this year which we believe is insufficient to spark any enthusiasm back towards the sector. However, we do not discount potential events such as award of Phase 2 of Klang Valley Double Track project (RM5 billion) and news flow on ECRL (possible revival) and Pan Borneo Sabah could alleviate the pessimistic sentiment towards the sector,” it added.
While the job flows in Peninsular Malaysia looks lacklustre following the change in government, Sarawak appears to have prospective jobs offers.
“We understand that industry players are aiming for jobs in Sarawak as its chief minister mentioned emphasis will be put on state water and rural road projects following the decision to shelve Kuching LRT project,” it said.
Funding for those projects is expected to come from the Sarawak state reserve of RM31 billion which is likely to insulate the projects from risk of cuts in federal government spending. The call for bids for the Sarawak Coastal Road and Second Trunk Road which has an estimated combined value of RM11 billion are expected in the near term.
In that light, HLIB maintains a “neutral” call on the construction sector post changes in federal government and the scrapping of mega rail projects.
“The domestic construction industry landscape is expected to remain challenging and we do not expect a significant improvement in the near term. The 37% decline in domestic contract awards in 2018 supports our view,” it added.
Nonetheless, high orderbook levels (average cover ratio of 4.5 times) following the robust job flows in the past two years coupled with rock bottom valuation (0.5 times price-to-book ratio) should cushion further downside amid subdued near term industry prospects.