KUALA LUMPUR: Domestic construction sector's medium-term earnings trajectory may be somewhat held back by margin pressures arising from an inflationary building materials cost environment and manpower shortages.
RHB Research said the government projects the construction sector's output to rebound by 11.5 per cent year-on-year (YoY) in 2022, but this comes off a low base, as 2021 industry output contracted 5.2 per cent YoY.
The bank-backed research firm also noted that local contractors are expected to continue facing labour shortages even after the government eased border restrictions on 1 April.
This is because applications from employers will have to go through the Home Ministry's evaluation committee to determine the number of foreign workers eligible for employment.
This could lead to a lack of manpower and result in construction work delays, RHB Research noted.
Meanwhile, the monthly average price of raw materials is on the up, with steel bar prices spiking 21 per cent YoY to reach RM3,411.75 per tonne in March, surpassing the peak of RM3,255.00 per tonne seen in July 2021.
Contractors may resort to accordingly pricing in the increased input costs into new tenders, leading to higher working capital needs that could push financing requirements higher, the research firm noted.
Further, RHB Research also highlighted that the disclosure of the Mass Rapid Transit Line 3 (MRT3) project details by the government seems to have sparked some positivity in the market, as this project should keep contractors busy in the coming years.
Nevertheless, the challenge lies in how the project will be funded, likely through a hybrid financing model being adopted in addition to the debt issuance by the Finance Ministry (MOF), whereby contractors will have to fund construction costs upfront amid the country's limited fiscal headroom.
"Therefore, we cannot rule out the possibility of future mega projects being scaled-down in value or financed via private funding initiatives," the research firm said.
"We foresee heightened volatility as we head closer to the upcoming general election. Market talk believes the 15th General Election (GE15) could happen in the second half (2H) of 2022.
"Based on the three previous general elections, the KLCON Index was underperformed in the six months leading up to polling day," it said.
RHB Research maintains Neutral for the domestic construction sector and advocates names from small- and mid-cap spaces like Kerjaya Prospek Group Bhd and MGB Bhd.
"Overall, we believe they have supportive catalysts to buffer near-term risks, supported by stable orderbook replenishment rates and robust balance sheets.
"Upside risks are shorter delays in work progress, success in securing new orders and cheaper raw materials while downside risks are longer-than-expected delays in works progress and higher raw material prices," it said.