PETALING JAYA: While output year-on-year (y-o-y) growth for the construction sector has been the largest among all economic sectors for the quarter ended Dec 31,2022.
RHB Research believes the absence of new infrastructure projects in the pipeline, aside from the Mass Rapid Transit 3 (MRT3), may continue to be a dampener to the sector’s sentiment moving forward.
The reserach house reported that the construction industry experienced a 10% y-o-y growth for the final quarter of 2022 (4Q22), as total value of construction work done in that period also increased on a quarter-on-quarter (q-o-q) basis, growing 4.8% q-o-q, marking its fifth consecutive quarter of sequential rise.
“We think this is attributable to the gradual improvement in working conditions, particularly on the labour front.
“Our channel checks indicate that contractors have been seeing better movement in terms of the arrival of foreign workers, post approval stage,” said RHB Research analyst Adam Mohamed Rahim in a note.
He added that for the full year of 2022, overall construction work done in the country expanded by 8.8% y-o-y after two years in contraction, thanks to the transition to “endemicity” as lockdowns ceased.
On the other hand, the lack of new projects being announced and awarded may contribute to a negative outlook on the sector.
The opinion is shared by many other analysts – with Adam noting that the total value of projects awarded to contractors on a monthly basis has been sluggish post-15th General Election.
He said, “The monthly total value of projects awarded to contractors has seen three consecutive months of y-o-y declines from December 2022 to February 2023.
“For example, February saw RM3.1bil worth of projects awarded to contractors, presenting a 64.7% y-o-y decrease, indicating the relatively slower pace of contract rollouts.”
Moreover, rising building material costs could also be a decelerating factor in the sector’s attempt to continue its recovery, said the analyst.
For example, he pointed out that the price of bulk cement incurred by contractors jumped to another record high of RM390 per tonne, a 42% y-o-y jump, in January 2023 and remained at this level in February 2023, largely due to the rise in raw material costs for cement which is coal.
“Meanwhile, the price of steel bars exhibited the third month-on-month increase, reaching RM2,968 per tonne in February 2023 – the highest since June 2022 – signalling that the overall downward price trend was short-lived,” added Adam.
Commenting further on the MRT3, he said while the potential reduction in project costs from RM50bil to RM45bil is not sizeable, the uncertainty in terms of timeline remains a point of concern for contractors given the aforementioned lack of other large infrastructure projects.
“The timeline to complete the said cost study may take three to five months, by our estimates.
“With the main contractors having to put up with a longer wait, tenders for subcontract packages may be pushed even further down the line,” he predicted.
While maintaining a neutral call on construction as a whole, RHB Research listed Kerjaya Prospek Group Bhd
and Sunway Construction Group Bhd as its sector top picks, with Adam mentioning these are examples of companies with their own niches.
“These two companies have ventured into the industrial building segment, which fetch higher margins.
“Moreover, Amazon.com Inc’s plan to invest RM25.5bil into Malaysia by 2037 may excite the data centre space as the investment includes cloud computing infrastructure.
“Such strategies enable these contractors to diversify their orderbook exposure, in light of the lukewarm sentiment facing the public infrastructure space,” he said.
