HLIB Research: Budget 2023 may trim down development expenditure to RM85b

by M JAY SHEILA / graphic TMR

THE government may slash development expenditure (DE) by 10.5% to RM85 billion in Budget 2023 when it is tabled in February next year, says Hong Leong Investment Bank Research (HLIB Research).

“Our economics team reckons there could be a possible curtailment in DE from the earlier high of RM95 billion which was tabled prior to 15th General Election (GE15) (unapproved). The possible revised DE number could come in at ~RM85 billion inclusive of US$3 billion (RM13.29 billion) 1Malaysia Development Bhd bond repayment.

“This would translate to flattish “clean” 2023 DE versus projected 2022 DE of RM71.8 billion,” HLIB Research said.

Going into 2023 and given consistent misses in actual DE disbursement over past few years, HLIB Research says it is not too perturbed by the lower headline numbers but rather concerned on its implementation due to late approval of Budget 2023, while changes to the procurement process may slow job flows.

Budget 2023 was announced on Oct 7 but not passed before the dissolution of Parliament on Oct 10 to make way for GE15. The timeline for the re-tabling of Budget 2023 should ideally be presented by December 2022, 

When announcing Budget 2023 in October, former Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz allocated a record RM95 billion in DE, from RM75.6 billion last year and RM64 billion in 2021.

He pointed out that RM16.5 billion was for the transport sector for major infrastructure projects, especially the Pan Borneo Highway, the Gemas-Johor Baru Twin Railway, the East Coast Rail Link (ECRL) project, the Johor Baru-Singapore Rapid Transit System (RTS) and the Central Spine Expressway.

Meanwhile, while tabling the temporary budget in Parliament on Tuesday (Dec 20), newly elected Prime Minister Datuk Seri Anwar Ibrahim who is also the finance minister announced that the updated Budget 2023 will be tabled in February next year.

HLIB Research expects the bulk of DE focus in the upcoming Budget to centre on flood mitigation, hospitals, water and various infra projects in Sabah and Sarawak.

The fate of the Mass Rapid Transit Line 3 (MRT3) will also be revealed in the budget announcement, it added.

While the newly appointed Minister of Transport Anthony Loke Siew Fook mentioned that ongoing mega projects, in particular the ECRL, will continue, HLIB Research did note that that sector’s only near-term catalyst, MRT3 was, however, not specifically green lighted.

“We believe for a complex mega project under procurement involving an estimated total price tag of RM50.2 billion, there could be a review by the new government (our base case). This is considering the much smaller RM11 billion Digital Nasional Bhd project and RM15 billion flood mitigation budget are also undergoing their respective review process,” it said. 

“We expect a potential three-six months review period to push awards to mid-2023 onwards. Our base case of no shelving of the project is also predicated on: i) the final loop to the Klang Valley railway transport and ii) external economic uncertainties next year could result in more domestic pump priming. Longer-term catalyst like the high-speed railway project looks to be a back burner issue and unlikely to make a comeback under the current administration,” it said.

With the uncertainties over the timing of mega-infra rerating catalysts, HLIB Research made no changes to its ‘Neutral’ construction sector weight for 2023.

“Meanwhile, our cumulative calendar year 2023 (CY23) earnings forecasts see growth at a muted 2.8%. Despite this, sector valuations are undemanding with 12.1x forward P/E (5-year mean) and 0.6x P/B (-1SD 5-year range),” it said.

Going into 2023, HLIB Research expects mild earnings growth as most companies under its coverage returned to pre-pandemic run rates in the second quarter of 2022 (2Q22), therefore, the higher base of comparison next year is “a tougher grind” considering a sluggish pace of general contract flows in 2022.

HLIB Research mentioned that the cumulative earnings for companies under its coverage are on course for a 95% increase in 2022 compared to last year given the low base while CY23 cumulative earnings growth is projected to downshift to a 2.8% increase.

“The slower projected growth comes mainly from a forecasted dip for Gamuda in CY23 due to tolls disposal. Generally, upside risks to CY23 forecasts are quicker-than-expected ramp-up of new projects and margin accretion from falling costs,” it noted.

“Bursa Malaysia Construction’s year-to-date (YTD) performance in 2022 is -2.2% in absolute terms. Things look better on a relative basis faring better than KLCI performance at +4.2%,” said HLIB Research.

As at November 2022, HLIB Research noted that domestic contract awards were flattish at -1.9% compared to a year before coming in at RM15.9 billion.

However, HLIB Research expects the negative gap to widen for a full-year comparison basis in view of GE15 disruptions.

“Public sector jobs were impacted by a dissolved Parliament, while private sector project awards were kept on hold until GE15 uncertainty passes. After a dry first half of 2022, 3Q22 saw big projects like Rasau (RM2 billion), MRT3-PMC (RM998 million) and RTS (RM2.7 billion) awarded,” it remarked.

Looking at the year as a whole, HLIB Research reckon the significantly volatile and inflationary costs environment has made tenders trickier as most contracts are typically executed on a fixed price basis.

Recently, the Transport Ministry has agreed to review five development projects with a total contract value of almost RM650 million so that they could be implemented via open or restricted tender.

This is in line with the new administration’s decision not to approve procurements without tenders.

While the trend of raw materials costs has stabilised in recent months, materials like cement saw a major leg up in prices in October this year and this tends to further delay project rollouts.

HLIB Research’s top picks for construction sectors are Gamuda Bhd maintained with ‘Buy’ with target price (TP) of RM4.15 and similarly, Sunway Construction Group Bhd maintained ‘Buy’ call with TP of RM1.83.