KUALA LUMPUR: The potential revival of the East Coast Rail Link (ECRL) and affirmation of the Penang Transport Master Plan (PTMP) projects could spark some optimism back into the construction sector.
Maybank IB Research construction analyst Adrian Wong said potentially lower margins and smaller orderbook replenishment for the second consecutive year will bring interest back onto the sector’s earnings delivery, especially from 2020.
“Sector valuation remains fair, balancing the risk-reward. The value of new job awards is expected to continue to moderate after the good years in 2016-2017 as a result of the reprioritisation of major infrastructure projects,” Wong said in a research note.
He said the 2019 Budget was spared from any announcement of new major infrastructure projects, making contractors’ orderbook replenishment opportunities will hinge on on-going projects.
The projects include the Pan Borneo Sabah, Gemas-JB double tracking rail and Central Spine Road.
“Orderbook wildcard could come from the PTMP, Klang Valley Double Track (Phase 2), Johor-SG RTS Link and potential revival of the ECRL,” he added.
Wong said the implementation of selected high impact projects such as KVMRT 2, Klang Valley Light Railway Transit 3 (KVLRT3), Pan Borneo Highway, Central Spine Road, Gemas-JB double tracking rail and new highways such as DASH, SUKE and WCE will continue, as reiterated in next year’s budget.
“However, Klang Valley Mass Rapit Transit 2 (KVMRT 2) and Klang Valley Light Rail Transit 3 (KVLRT 3) have seen significant reductions to their total project values post their respective cost review initiatives,” he said.
Pakatan Harapan’s election manifesto also mooted the review of all highway concession agreements, taking over every toll concessions with the ultimate aim of abolishing highway tolls in stages.
However, Wong said this had been deferred until the country’s finances improve.
“As such, we think a scenario for expropriation is unlikely for now, but uncertainty remains on whether toll rates will be cut and if any form of compensation will be given,” he said, adding that a study on the highway concessions was underway with an earliest update expected by the first-half of the year.
Wong said the cancellation of major infra projects, replaced by the pool of new projects to be put up for tender, was expected to be significantly reduced.
“We expect the values of contracts to be awarded to also be smaller in comparison to those awarded in the recent years. This could be supported by awards from the Pan Borneo Sabah, Gemas-JB double tracking rail and Central Spine Road for their remaining packages,” he said.
With the contractors now vying for a smaller pool of contracts, he expects lower construction margins for their newly-secured projects as a result of stiffer competition.
“Profit margins up to six per cent are likely to be the new norm from up to 10 per cent, previously. We believe contractors with higher orderbook to cover ratios are likely to have more resilient margins over this period of fiscal consolidation.”