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Infrastructure boom for contractors in 2015

KUALA LUMPUR: Thanks to the government’s ambitious infrastructure goals, 2015 will likely be a busy year for contractors.

“Judging by Budget 2015, it is going to be a good year for the construction sector because the government is ramping up infrastructure development. So, the usual challenges like job prospects and filling up an empty order book will not likely be what contractors worry about next (this) year,” Kenanga Research analyst Iqbal Zainal told The Edge Financial Daily.

Last October, Prime Minister Datuk Seri Najib Razak announced the construction of the RM5.3 billion Sungai Besi-Ulu Klang Expressway, the RM5 billion West Coast Expressway, the RM4.2 billion Damansara-Shah Alam Highway and the RM1.6 billion Eastern Klang Valley Expressway.

In addition to the highways, the RM23 billion Mass Rapid Transit 2 line from Selayang to Putrajaya, the RM69 billion Pengerang Integrated Petroleum Complex and the LRT 3 projects are all in the pipeline for the new year.

As a result, Kenanga Research has an “overweight” rating on the sector. Specifically, Gamuda Bhd and Muhibbah Engineering (M) Bhd are the research house’s top picks as they are likely to be beneficiaries of government infrastructure projects.

The only challenge contractors may face, according to Iqbal, is in keeping cost structure efficient.

“Cost will be challenging for construction players because there will be intense competition for resources to complete jobs. So, they will have to balance their order books against their own budget and resources,” he explained.

UOB KayHian Research head of research Vincent Khoo is similarly optimistic about the sector and has an “overweight” rating on it, citing building material cost as a main reason and manpower shortage as the sector’s main challenge.

“We are currently overweight on the sector as medium-term earnings visibility is good, underpinned by potential lower costs, amid lower oil prices of several building materials such as bitumen,” Khoo said.

“Manpower will be a key challenge given there will be many construction projects undertaken concurrently. But there is also the potential of lower development expenditure by the government amid lower revenue derived from lower oil prices” he added.

IJM Corp Bhd is UOB KayHian Research’s top pick as the research house sees the execution of the West Coast Expressway project is on the way and will anchor the company’s middle-term earnings of RM2.8 billion, with a potential upside of an additional RM22 billion, via open tender. 

It noted that IJM also stands to gain from the Kuantan Port extension project worth approximately RM1.5 billion.

On the ground, industry players echoed analysts’ positive outlook for the sector but voiced concerns about completing the projects due to limited resources such as manpower and machinery.

“I think 2015 is a year where contractors will enjoy themselves because there will be a lot of work going around, especially with government projects. But we hope that this kind of boom in the sector will be sustainable. 

“We hope the government will implement its projects progressively, rather than all at one go, because there is a real shortage of manpower and machinery. Everyone is going for the same limited pool of resources,” Master Builders Association Malaysia president Matthew Tee told The Edge Financial Daily.

“We are [already] seeing a real shortage of manpower at construction sites. The industry is dependent on foreign labour and with the recent government policies and crackdowns on migrant workers, we may face greater difficulty in completing our jobs,” he said.

Tee is also worried that competition among industry players for resources could drive up costs  and cause “bare, single-digit” profit margins to depreciate further.

“Contractors are service providers and should be fairly paid for their services. But, at this point, competition is so stiff that contractors are more concerned about securing jobs than profit margin,” he said.

While the outlook for infrastructure-related construction is upbeat, property development-cum-construction firm Ken Holdings Bhd chief executive Sam Tan said the outlook for private sector construction may be “dampened” by persisting cooling measures introduced by the government on the property sector.

“There is always a close link between the property development market and the private sector construction. When there is a slowdown in property development, construction firms will also feel the impact,” he said.

“There is no question that the property market has seen softer growth in transactions and developers have held back or postponed their property launches. When that happens, it is inevitable that the private construction sector will have fewer jobs,” he said.

Despite that, Tan is hopeful that private sector contractors will benefit from the knock-on effect of the government’s infrastructure development.

“I don’t think property developers will be very aggressive this year with their launches. However, we hope that the ongoing infrastructure development will open up new areas and create [more] opportunities for property development eventually,” he said.

 

This article first appeared in The Edge Financial Daily, on January 5, 2015.

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