Possible headwinds from mega project review

PETALING JAYA: The new ruling coalition Pakatan Harapan’s (PH) move to review some mega projects may create some headwinds in the construction sector in the short term, but as clarity prevails, it could benefit the sector on the whole and ease expected selling pressure on construction stocks.
As it is still too early at this juncture to predict the fate of mega projects like the East Coast Rail Link (ECRL) and the KL-Singapore high-speed rail (HSR) project under PH’s rule, some analysts told StarBiz that they are hopeful that these projects could still take off, although there could be some delays as the ruling coalition partly would need to further assess them, adding that these were key projects that would benefit the economy in the long term.
“Take note that Tun Dr Mahathir Mohamad and some of his Pakatan team are veterans when it comes to mega projects. With their vast experience, they will not simply scrap infrastructure projects in the name of prudence if it will benefit the construction sector, which is one of the key contributors to the country’s gross domestic product.
“Stocks like Gamuda Bhd, IJM Corp Bhd and YTL Corp Bhd, among others, have good fundamentals and track records in construction. So, whatever selling pressure on the construction stocks would be a knee-jerk reaction to Pakatan’s victory, as fundamentals will prevail over time. Just wait for further announcements on Pakatan’s stand on these projects to get a clearer picture,” an analyst said.

“Before making any decisions to scuttle these projects, these high-impact projects should be thoroughly and objectively reviewed to ascertain their full costs and benefits, including the mode of financing and the country’s financing capacity. Breaking contracts and not proceeding may end up to be more costly, including irreparable damage to reputation and cross-border ties.
“Options such as rescheduling, redesigning or resizing to find the optimal mix to meet the country’s needs and financial ability could be explored since infrastructure projects are usually a question of when we need them and can we afford them at the present time.
“Striking the right balance is important to avoid excessive debt burden and excess capacity, while not missing the opportunity to expand and modernise the country’s infrastructure. Of the two, the ERCL may not be economically viable and is more likely to be scuttled if there is a need to choose one of the two rail projects,” Yeah said.
A country’s infrastructure needs to be expanded and upgraded continuously, he said, adding that properly sequencing them in line with the country’s needs and financing capability is important to avoid over-indebtedness and financial vulnerability.
Meanwhile, Aminvestment Research in a note said it expects the construction sector to come under some selling pressure. “We see trading opportunities for construction stocks on the market’s over-reaction to the downside. We believe public infrastructure spending is too on the agenda of the new administration, and once it settles in, it should start identifying a fresh list of projects to be implemented,” it noted.
Also, it added that in its election manifesto, the new administration spoke of putting toll road concessions under review, with the possibility of a takeover by the government with “fair compensation”.
The research house said although there is a real risk that ongoing and pending mega infrastructure projects such as the MRT2, LRT3, ECRL, Pan Borneo Highway, Gemas-Johor Baru electrified double tracking, HSR, etc, may be scaled down, deferred or even cancelled on grounds of financial prudence, a more transparent public procurement system or tendering process is likely to be introduced to plug leakages, which will result in lower margins for players.
AllianceDBS said it expects headwinds for the construction sector with PH coming on board, as the ruling coalition has vowed to review all mega projects which have been awarded to foreign parties to ensure they are done in the best interest of the nation. The research house added that it had dropped Gamuda and Sunway Construction Group Bhd
 as its top picks.

CIMB Research analyst Sharizan Rosely, who is maintaining an overweight stance on the construction sector, said there could be some impact in terms of investor sentiment on the construction sector based on PH’s manifesto.
“Investors generally concurred with our view that Pakatan’s manifesto relating to construction contracts (though for the greater good over the longer term) could trigger uncertainties over the status and progress of mega rail jobs. We used the anecdotal example of 2008 (GE12) when selected mega contracts were cancelled, deferred, or reviewed.
“We also highlighted that three months prior to GE12, the KL Construction (KLCon) Index derated 16% and declined a further 13% in the three months post-GE12,” he noted.
The KLCon Index is currently down 11% to date. The construction counters on Tuesday were still seen holding up prior to the GE, with Gamuda closing three sen up to RM5.10, YTL flat at RM1.33, IJM up one sen to RM2.65, Sunway up one sen to RM1.54, Muhibbah Engineering up five sen to RM3.04 and Malaysian Resources Corp
 Bhd flat at RM1.00.


Read more at https://www.thestar.com.my/business/business-news/2018/05/11/possible-headwinds-from-mega-project-review/#okR5EizeA0JqpVI3.99

 Note:
1. Overweight as part of a three-tiered rating system, along with "underweight" and "equal weight", is used by financial analysts to indicate a particular stock's attractiveness. If a stock is recommended to be "overweight", the analyst opines that the stock is better value for money than others

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