HLIB: Worst is over for construction sector


The rising number of contract awards in the construction industry indicates a better outlook after the government moved to evaluate some mega projects, said Hong Leong Investment Bank (HLIB) Research.

In a research report published yesterday, it noted that domestic contract awards rose by 4% year-on-year in value to RM4.8 billion in the first quarter of 2019 (1Q19) and 20% over 4Q18.

“The job awards increased mainly due to the resumption of major infrastructure projects after being reviewed by the government. Recent positive newsflow signified that the worst could be over for the construction industry,” HLIB said.

Of the total, foreign contracts amounted to RM615 million — derived mostly from the marine bridge contract in Taiwan secured by Gamuda Bhd.

“We expect more domestic contractors to bid for foreign jobs, given the continued slowdown in the domestic construction landscape,” HLIB said.

HLIB, however, does not expect the domestic construction industry to return to its state prior to the 14th General Election (GE14) held last year.

“Among the signs of recovery are the completion of cost reviews, resumption of some mega infrastructure projects and the revival of 121 infrastructure projects worth RM13.9 billion offered through direct negotiations and limited tenders by the previous government after cost reviews,” it said.

HLIB added that the potential revival of the East Coast Rail Link project and the approval of high-impact projects under the midterm review of the 11th Malaysia Plan, such as the Kulim airport, could help reignite the domestic construction industry.

The research house stated that most of the contracts awarded are mostly small to medium-sized projects under RM500 million in value.

“Notable domestic contracts during the quarter include the construction of Tenaga Nasional Bhd’s campus in Bangsar worth RM781 million and Malaysian Resources Corp Bhd’s construction of three blocks of apartments worth RM409 million,” it said.

The research firm said as construction jobs have subsided in Peninsular Malaysia, industry players are looking at projects in Sarawak due to support from the state government.

“Job flows in Peninsular Malaysia slowed down significantly post-GE14. We understand industry players are aiming for jobs in Sarawak as the state government has allocated RM9 billion for development expenditure under the 2019 state budget — the biggest in the history of the state.

“Funding for the projects is expected to come from Sarawak’s state reserves — about RM31 billion — which may insulate the projects from the risk of a reduction in federal government spending,” HLIB said.

HLIB maintains its ‘Neutral’ stance on the sector amid changes in the government and the review 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.

Nonetheless, decent orderbook levels with an average cover ratio of 2.9 times following the robust job flow in the past two years, coupled with recent positive newsflow, signifies that the worst is over
for the industry,” it noted.