Sarawak: Transitioning into an economic powerhouse

Most competitive unsubsidised electricity tariffs in Asean, business-friendly policies and abundant RE sources enabled the state to attract foreign investors

by ADAM MOHAMED RAHIM & NAI WAN YAN / pic BLOOMBERG

SARAWAK is upping its ante with supercharged infrastructure. In light of the higher development expenditure (DE) allocated for Sarawak — not just at the federal, but state level, we view that catalytic infrastructure enhancement will take place. This is further backed by the state’s Post-Covid-19 Development Strategy (PCDS) 2030, which aims to reach a GDP of RM282 billion by 2030 versus the estimated RM146 billion for 2023 based on the projection by Sarawak’s Economic Planning Unit.

Key infrastructure components: We identified sectors such as water (pipe works, flood mitigation and water treatment plants), transportation (Kuching Autonomous Rapid Transit [ART] and several highway projects), and renewable energy (RE) (in the form of hydropower) via cascading dams and industrial gas production (hydrogen), coupled with the potential setup of data centres to present infrastructure expansion opportunities. New oil well discoveries off the shore of Sarawak combined with its location to be a prime spot for carbon capture and storage (CCS) may also drive the demand for related infrastructures.

Sweet spot to gain from foreign investments: Factors such as having the most competitive unsubsidised electricity tariffs in Asean, business-friendly policies and abundant RE sources (namely hydropower) have enabled Sarawak to attract foreign investors. Recall that the state saw foreign investments worth RM12.4 billion in 2022 compared to RM9.4 billion in 2021 — making it also the third highest state in terms of foreign approved investments after Johor (RM58.8 billion) and Selangor (RM33 billion). The inflow of foreign investments may translate into the need to set up infrastructure in industrial areas such as the Samalaju Industrial Park and Sarawak Petchem Industrial Park in Bintulu.

Contractors are set to benefit from Sarawak’s infrastructure wave. Even for 2022, Sarawak recorded the fifth largest value of construction projects among the country’s states, at RM9.9 billion. Regarding the value of construction work done, Sarawak has seena continuous increase since 2017, except in 2020 when the sector was hit by the pandemic. Sarawak recorded RM14.6 billion of the value of construction work done in 2023 (the fourth largest after Selangor, Federal Territories and Johor — representing a five-year compounded annual growth rate of 4.5%, which is commendable in comparison to most other states, which saw a decline.

Sarawak infrastructure thematic stock ideas. KKB Engineering Bhd is the top pick for the Sarawak plays under our coverage given its diverse infrastructure exposure followed by IJM Corp Bhd which is gradually regaining its footprint in the state. We also take note of Gamuda Bhd’s track record in Sarawak via the Pan Borneo Highway (PBH) and Second Trunk Road (STR) projects. We also highlight Ibraco Bhd as a non-rated idea for Sarawak.

Key risks: Unforeseen pandemic outbreaks and unexpected downward revision in DE for the state.

Featured Stock Ideas

KKB Engineering (Buy, 52-Week Target Price [TP]: RM2.02) — Sarawak’s strategic infrastructure proxy KKB Engineering is the main pick under our coverage for Sarawak’s infrastructure plays due to its diverse infrastructure exposure in the state, spanning projects related to highway, water supply and fabrication of steel structures for oil and gas structures alongside industrial buildings. The presence of Sarawak Economic Development Corp (SEDC) as a shareholder (10.7% stake) in the group may position it at the forefront when it comes to state-centric development projects. Balance sheet-wise, the group is in a net cash position which may enable it to conveniently gear up if required in the future to make way for any potential expansion. For instance, it has set up a subsidiary, KKB Energy, which intends to undertake the construction and manufacturing of utility projects and parts, transportation projects and other related support services relating to RE such as hydrogen electrolysers assembly and processes.

IJM (Buy, TP: RM2.47) — Gradually regaining a foothold in Sarawak. We remain upbeat on IJM’s effort to strengthen its presence in Sarawak. The last job IJM was involved in Sarawak was the Murum Dam access road worth RM246.7 million (secured in 2010) via two packages. Fast forward to 2023, the group via its industrial concrete products inked a memorandum of understanding with SEDC for the potential establishment of the group’s first piles manufacturing base in Sarawak. We view this to be timely in light of the anticipated infrastructure wave in the state. Moreover, IJM’s RM260 million job win for the Kuching ART’s Rembus depot via a joint venture (JV) with Azam Sehasrat Sdn Bhd and Unique Deco Sdn Bhd indicates that the group is actively eyeing infrastructure jobs in the state. As such, we do not discount the possibility of it participating in the upcoming tenders for the Kuching ART.

Gamuda (Buy, TP: RM6.46) — Already building expertise in hydroelectric dams. Gamuda is no stranger to Sarawak as the group secured road-related projects namely PBH Sarawak and STR projects. Both of these projects are executed via a JV with Naim Holdings Bhd. While the group did not hint at eyeing any infrastructure projects in Sarawak, we take comfort from Gamuda’s current role in developing the 187.5 megawatts Upper Padas Hydroelectric Dam in Sabah (estimated cost: RM4 billion). Such exposure in hydroelectric dams could pave the way for it to stand a chance in Sarawak’s plan to develop cascading dams.

Ibraco — building up its construction orderbook alongside its property business. Ibraco is a Sarawak-based property developer with 72% of FY22 revenue coming from property development, while the remaining revenue was contributed by construction (17%) and quarry operations (9%). The group made headlines in November 2023 after securing an RM569 million contract for Kuching ART via a JV with two other parties with Ibraco holding a 51% share.

Additionally, we observed that its riverside mixed development project, NorthBank, is located near the proposed Kuching ART route it is building (particularly near the Jalan Stutong stretch) — indicating that the development would be attractive once the project is developed. In the same year, the group successfully secured an RM530 million contract to construct a portion of the STR in Samarahan. Before this, it had clinched an RM303 million contract related to the new Mukah Airport in 2017. In short, we view such projects to strengthen the group’s ability to expand its construction orderbook of RM1.5 billion as of the end of 3Q23.