Construction sector to benefit from higher Budget 2021 spending

Analyst expects contractors to price in higher margins to factor in higher cost of testing and risks


THE government will raise its allocation for infrastructure spending in the upcoming Budget 2021 announcement on the back of the weak economic conditions.

AllianceDBS Research Sdn Bhd analyst Chong Tjen San predicts Putrajaya will use lessons learnt from the global financial crisis (GFC) 2008/2009 play book to kickstart domestic economic engines.

“We think the recent second quarter 2020 (2Q20) Malaysia GDP contraction of 17% — the worst decline since 4Q98 — would be a precursor to a more aggressive allocation for infrastructure spending in the coming budget in November.

“With the record-low interest rates now, we expect global economies, including Malaysia, to whip out the 2008 play book and roll out high multiplier infrastructure projects,” he said in a note yesterday.

He added that there are similarities between the GFC period and Covid-19 pandemic crisis today.

Chong said Malaysia is currently at the tail end of the 11th Malaysian Plan (11MP) (2015-2020), which is akin to 2009 which was the tail end of 9MP. The 12MP will be tabled in January 2021.

In 2009, the budget deficit widened to 7% and the debt-to-GDP ceiling was raised twice to 55%. The government today has a higher tolerance for a wider budget deficit as evidenced by the various stimulus packages announced to revive the economy post-Movement Control Order.

In addition, Chong said the dominant component party in the Perikatan Nasional government has a reputation of rolling out contracts aggressively, implying the revival of the Bandar Malaysia project and subsequently the Mass Rapid Transit Line 3 (MRT3) and high-speed rail (HSR) projects.

In 2009, there was an emphasis on Private Financing Initiatives (PFI) and it will also be the case in 2020.

AllianceDBS Research also expects higher adoption of industrialised building system to lead to reduced labour reliance, lower private sector building tenders and delays to factor in lifestyle changes.

It also expects contractors to price in higher margins to factor in higher cost of testing and risks due to social distancing, reduced cross-border opportunities and enactment of a Covid-19 bill.

“Construction uptrend cycles have been long — the trough to peak for the past three cycles has been between 16 and 30 months.

“While a snap election may delay project awards, valuations are already at a 10-year trough or -2SD of its 10-year mean,” Chong noted.

AllianceDBS Research’s top picks for the sector are Gamuda Bhd, IJM Corp Bhd and Sunway Construction Group Bhd for their strong execution track record, balance sheet strength and reputation in largescale public sector jobs.

Gamuda is the firm’s top pick ahead of the impending revival of key infrastructure projects such as MRT3 and HSR.

AllianceDBS Research reiterates its ‘Buy’ rating on Gamuda with a target price (TP) of RM4.60. The counter closed 14 sen or 4% lower to RM3.36 yesterday.

It also maintains its ‘Buy’ call on IJM, with some-of-parts derived TP of RM2.20. IJM’s share price dipped one sen or 0.73% to RM1.36 at the close of trade yesterday.

AllianceDBS predicts the stock to be a key beneficiary of a revival in government spending expected to be announced at the upcoming Budget 2021, in addition to the disposal of its stake in Scomi Group Bhd which removes a key overhang on the stock.

The research house also maintained its ‘Buy’ call on Sunway Construction with a TP of RM2.30. The counter closed two sen or 1.08% lower to RM1.83 yesterday.

AllianceDBS stated Sunway Construction remains a strong proxy to the anticipated revival in infrastructure spending given its experience and solid track record in rail-based projects such as MRT and light rail transit.

Its internal pipeline of projects from its parent company also gives it a comfortable base of orders every year, Chong said.

He expects Sunway Construction’s balance sheet to remain solid and dividend payout ratios to be maintained.