The revival of large-scale infrastructure projects is the catalyst needed to provide further upside for construction stocks, says expert
by SULHI KHALID / pic by BERNAMA
THE first half of the year (1H19) witnessed the government reinstalling several mega projects — Bandar Malaysia and the East Coast Rail Link (ECRL), with revisions being made to the entire cost of construction as part of its effort to review mega projects.
These projects, which initially were abruptly terminated amid concern on the country’s fiscal condition, are now luring major construction players to bid for contracts.
The government’s decision to revisit the multibillion projects has also prompted investors to rekindle their interest in several construction counters.
To date, the Bursa Malaysia Construction Index has rallied 11.92% to 230 points, outperforming the benchmark
FTSE Bursa Malaysia KLCI, which is currently yielding a negative 0.1% return.
“Contractors we met recently sounded more optimistic with the sector’s prospects, especially in 2H19,” RHB Bank Bhd senior equity research analyst Tay Yow Ken said.
The research house is of the opinion that the revival of large-scale infrastructure projects is the catalyst needed to provide further upside for construction stocks.
The Malaysian Reserve looked into some of the mega projects and several construction counters’ performance over the last six months.
In April, Prime Minister Tun Dr Mahathir Mohamad announced the government’s decision to reinstate the Bandar Malaysia project with a few changes being made to the original plan.
The 486-acre (197ha) multibillion project will now include 10,000 affordable housing units, with assurance in Bumiputera participation throughout the project and priority given towards local contents and materials.
DBS Bank in its report highlighted that the revival of Bandar Malaysia project would make Malaysia a financial hub, in addition to other commercial and residential contents.
“Assuming the construction cost is 50% of its RM140 billion gross development value, there is an estimated value of RM70 billion worth potential building construction works for Bandar Malaysia,” the research house said.
Other contracts would be in relation to earthworks, piling and infrastructure jobs within the development, and this will certainly benefit the local industry players.
The Kota Baru-Port Klang ECRL project previously went through a series of negotiations, with the government finally able to reduce the total construction cost to almost a third of the original cost.
The new price for the cost is now set at RM44 billion, down 33% from the previous RM66 billion.
MIDF Research in a report stated that the railway transportation project is expected to yield 2.7% contribute to Malaysia’s GDP.
“However, the full estimated GDP contribution will depend on the pace of spillover effects to other economic sectors,” MIDF said.
Pending the government’s review, the Mass Rapid Transit Line 3 (MRT3) project
will be part of the overall MRT structure, which is targeted to improve connectivity in the densely populated Klang Valley region.
Dr Mahathir in May 2018 initially announced the cancellation of the 40km public rail line project. However, the project has been reinstated, despite being deferred to determine the new overall cost.
MRT3, which is the last of the MRT lines in the Klang Valley, was slated to pass through areas such as Kerinchi, Jalan Duta, Setiawangsa, Salak Selatan, Pandan Indah and Bandar Malaysia via underground rail tracks, as it is largely a railway line around the city centre.
Construction and property company Ekovest Bhd, has risen 37.3% year-to-date (YTD) following speculation on its involvement in the Bandar Malaysia project, together with Iskandar Waterfront City Bhd (IWC).
Both companies are controlled by property tycoon Tan Sri Lim Kang Hoo.
Ekovest shares were once hit limitup due to the speculations. However, the group had issued a statement to deny its role and involvement in the multibillion project in Sungai Besi, Kuala Lumpur.
Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (M) Sdn Bhd (CREC) were the winners of the Bandar Malaysia project before their status as master developer was scrapped in May 2017.
IWH-CREC is a 60:40 joint venture where Lim holds a where Lim holds a 63% stake in IWH, while Kumpulan Prasarana Rakyat Johor Sdn Bhd owns the remaining 37%.
Currently, Ekovest shares are trading at RM0.88 with a market capitalisation of RM2.3 billion.
It has been a roller-coaster ride for the engineering, property and infrastructure company Gamuda Bhd.
The group has risen 23.5% YTD and recently reported a fall in its third quarter (3Q) net profit by 14.6% to RM175 million.
Last week, in Bank Islam Malaysia Bhd’s view on the group performance, it stated that Gamuda’s management had remained upbeat on the local construction sector amid the revival of the ECRL and Bandar Malaysia projects, with the latter potentially leading to the revival of the proposed high-speed rail project as well.
“Gamuda remains our sector favourite given its RM10 billion orderbook, RM2.2 billion in unbilled sales and potential special dividend in view of the group’s growing cash pile,” it said.
Presently, Gamuda is trading at RM4, valuing the company at RM9.5 billion.
George Kent (M) Bhd’s shares rose 3.2% YTD as a result of the mega projects’ revival.
The group, which posted a lower 1Q net profit by 37% to RM13.5 million, had in January signed a revised fixed price contract of RM11.4 billion with Prasarana Malaysia Bhd for the LRT3 project.
The group currently has a RM5 billion orderbook and is planning to increase the earnings contribution from its metering business to 50% in the medium term.
George Kent shares are currently trading at RM1.20 with a market capitalisation of RM620 million.
IJM Corp Bhd’s shares had risen 53% YTD as it is one of the potential beneficiaries of the ECRL project.
The group posted a 13 times jump in its earnings for the 4Q to RM240 million from RM17 million recorded in the previous corresponding quarter, as its infrastructure division returned to the black.
According to MIDF, IJM could leverage on its expertise in engineering construction capabilities and it may be the biggest contender for the ECRL project.
“IJM has a strong presence in the east coast region. Currently, IJM owns a 60% stake in Kuantan Port including 700 acres of industrial land near the port,” it said.
IJM shares are trading at RM2.46, valuing the company at RM9 billion.