'HSR postponed, not scrapped' comes as a relief to construction companies

Construction sector

Maintain neutral: The ongoing reviews of public-sector infrastructure projects have raised uncertainties over the status of ongoing and planned infrastructure projects. This has led to volatility in the share prices of construction stocks. Prime Minister Tun Dr Mahathir Mohamad said the Kuala Lumpur-Singapore high-speed rail (HSR) project has been postponed, and not scrapped as stated previously, leading to a relief rally for impacted firms.

These developments indicate that the infrastructure spending cuts may not be as severe as initially portrayed in statements made by the new government previously. We believe part of the reason is due to costly cancellation clauses in government-to-government contracts signed for the East Coast Rail Link (ECRL) and the HSR. If the HSR is revived, companies involved such as Gamuda Bhd, Malaysian Resources Corp Bhd, YTL Corp Bhd and HSS Engineers Bhd are potential beneficiaries.

If construction of the ECRL project continues, Malaysian contractors pursuing subcontracts such as IJM Corp Bhd, WCT Holdings Bhd and Advancecon Holdings Bhd are potential beneficiaries. The cancellation risk for HSS’ ECRL contracts, worth about RM130 million (19% of its order book of RM673 million), is also reduced.

There was good investor interest in our recent macroeconomics/construction-sector outlook analyst meetings. We met up with 23 foreign institutional investor firms in Singapore and Hong Kong. Most investors were concerned about the short-term impact from the transition to a new government but acknowledged the good long-term prospects of a more transparent and efficient government.

We reiterate our “neutral” call on the construction sector due to potential delays in implementation of infrastructure projects and a reduction in government infrastructure spending. This will reduce the order book replenishment prospects of contractors. Our top buys are IJM (large-cap), Sunway Construction Group Bhd (mid-cap) and HSS (small-cap). — Affin Hwang Capital, June 14

This article first appeared in The Edge Financial Daily, on June 18, 2018.

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