IJM, WCT, Gadang likely beneficiaries of US$27b Pengerang project

KUALA LUMPUR: IJM Corp Bhd, WCT Holdings Bhd and Gadang Holdings Bhd are likely beneficiaries of the US$27 billion (RM88.56 billion) Pengerang Integrated Complex (PIC) development in Johor. Project owner Petroliam Nasional Bhd (Petronas) received the stamp of approval to proceed last Thursday.

However, analysts covering the construction sector warned that handling a project of such scale, when the country is already busy with other mega infrastructure projects such as the RM22.2 billion Klang Valley mass rapid transit system (MRT 1), is not without difficulties.

Projects like the RM25 billion MRT Line 2 and the RM6 billion West Coast Expressway, which were recently approved by the government, are expected to be handed out this year.

“The construction industry will definitely benefit from the PIC project in the early stages and you will see the extent of it when construction contracts are being awarded in the next three to six months,” UOB KayHian Research analyst Danny Chan told The Edge Financial Daily.

He sees IJM Corp, WCT and Gadang as key beneficiaries of the PIC project in the construction sector.

Gadang was awarded the first earthworks package worth RM313 million in Pengerang and is eyeing more contract awards from the project.

Chan said the biggest challenge within the construction industry with such healthy contract flows is the shortage of workers which in turn will cause inevitable delays to the completion of projects.

“In a way, everything is coming in at around the same time … Managing two major projects [MRT 2 and PIC] in the country at the same time is very challenging and companies which win awards will have to be more prudent in managing their resources to ensure delivery.

“For investors, you don’t want to invest in companies which want to do everything but cannot deliver on their promises. You have to be cautious with your investments,” he said.

The complaint about manpower shortage is not new, and is a persistent and critical issue. To drive home the point, Kenanga Research analyst Iqbal Zainal said Peninsular Malaysia faces an acute shortage of sub-contractors, so much so that many have to be engaged from Sarawak to support the high volume of work here.

For the development of PIC, Petronas had said that 4,000 employees at the operational stage and 70,000 workers of varying skills and disciplines at the peak of construction will be required.

Iqbal said listed players involved in the construction industry need to learn from the disappointing results delivered in the last few quarters due to lower-than-expected burn rate of order book, but higher-than- expected operating costs, to manage their labour resources better.

Construction companies are now “aggressively importing” foreign talent and are prepared to “pinch” workers from competitors.

“The impact of PIC on the construction sector is definitely positive. [The construction companies’] order books have been increasing, but not [in line with] their capacity.

“Now, they are addressing this issue and working to gear up on their capacity. They will have to manage the situation,” said Iqbal.

“The PIC site is huge; it is almost as big as Malacca … There is a risk that undocumented workers will be used, but this can be mitigated by importing labour,” he said.

The construction of PIC is expected to be completed in early 2019, but it will only commence once the project site has been handed over to Petronas.

Chan said that this, too, poses a risk of delay to the date of starting the construction as Petronas has faced protests against the construction of PIC and issues surrounding that have yet to be resolved completely.

“The Johor government is expected to push it [the site handover] through, but there will be some delays and this may lead to cost overruns,” he said.

Both Chan and Iqbal, citing the construction of klia2 as the precedent, believe that project delays are now a common and predictable feature of complex projects.

At the very least, the initial delay to the commencement date for construction may offer industry players extra breathing space to tackle the labour issue.

Shares in IJM and Gadang rose one sen or 0.16% and one sen or 0.83% to close at RM6.21 and RM1.22 respectively last Friday, while WCT closed down three sen or 1.38% to RM2.15.

PIC is part of the larger Pengerang Integrated Petroleum Complex (PIPC) proposed and promoted by the federal and Johor governments.

This article first appeared in The Edge Financial Daily, on April 7, 2014.


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