This article first appeared in The Edge Malaysia Weekly on November 27, 2023 - December 3, 2023

CONSTRUCTION industry players are in a bind. Post-pandemic, smaller contractors have had to contend with higher costs of doing business as they compete for foreign workers, as well as pay higher prices for building materials, eating into their already thin margins.

At the same time, contractors claim that public projects have been slow to come by, leading to intense competition for private jobs.

Oliver Wee Hiang Chyn, president of Master Builders Association Malaysia (MBAM), tells The Edge: “We are looking to the government to expedite the commencement of key catalytic construction projects that have already been announced to the public. The delay in getting these projects off the ground not only affects progress, but also puts many contractors in a difficult position, as they cannot indefinitely carry the holding cost for staff designated for these projects with unclear roll-out timelines.”

He points out that many contractors are already suffering from a price escalation and the impact of geopolitical crises in Europe and the Middle East. Many of the key catalytic projects are ready to be awarded, pending approval from the federal government or the Ministry of Finance.

Since taking over Putrajaya in November 2022, Prime Minister Datuk Seri Anwar Ibrahim — who is also Minister of Finance — has announced a slew of infrastructure projects via the two budgets he has presided over. These include the Gurney Drive–Bagan Ajam undersea tunnel project, upgrading of the Senai–Desaru Expressway, widening of the North-South Expressway, the Mass Rapid Transit Line 3 (MRT3), the Penang International Airport expansion and the redevelopment of Subang International Airport.

According to industry players, however, these projects have yet to take off even though the government announced record spending in its annual budgets.

UOB KayHian strategist Vincent Khoo concurs that it is a worrying situation for construction players, especially the smaller ones. He says the sector emerged from the Covid-19 pandemic significantly weaker.

“Therefore, the industry still needs mega infrastructure project roll-outs to boost project pipelines,” Khoo tells The Edge.

Adam Mohamed Rahim, an equity research analyst at RHB Investment Bank, says that while some contractors do have a sizeable percentage of private market jobs in their order books, they are still eyeing large-scale public jobs that can further solidify earnings prospects.

“Nevertheless, we cannot deny the huge spillover effect of public jobs on the construction industry as a whole — to main contractors and subsequently subcontractors,” says Adam.

Data on how much public projects have been awarded so far is not readily available for The Edge to analyse. The Department of Statistics Malaysia (DOSM) has, however, released data on the value of construction works done up to the third quarter of the year.

In 3Q2023, the value of work done was RM33.44 billion, up 9.6% year on year. The value is the highest since 1Q2020, when RM35.04 billion worth of construction works were done.

Quarterly growth in the value of the work done dwindled, however, to a mere 0.8% in 1Q2023 and 0.4% in 2Q2023.

Still, the 3Q2023 figure was up 3.4% q-o-q, the fastest growth since the contraction of 12.2% q-o-q in 3Q2021.

DOSM also provides data on the value of work done from government contracts. In 3Q2023, the value was RM6.9 billion, which is about the same value since 3Q2022. Prior to the pandemic, the peak value was RM7.94 billion in 1Q2020.

Judging from DOSM data on the value of work done, construction players are still riding on good numbers so far. In fact, many analysts are bullish on the outlook for the sector, as political instability has been reduced, with the conclusion of the state elections in August this year.

“We are also expecting construction activities to improve, as the construction sector’s labour shortage has been addressed, and with both public and private enterprises actively planning project roll-outs after the recent state elections,” says UOB KayHian’s Khoo.

In a Nov 7 strategy note on Malaysian equities, CGS-CIMB recommends a “double overweight” on the construction sector, demonstrating its confidence in policy continuity.

“Our key picks providing compelling exposure across the project spectrum are Gamuda, YTL, Sunway Construction, Sunway, IJM, Malayan Cement, Muhibbah Engineering and HSS Engineers.

“Although the KL Construction Index is up 21% year to date (driven partly by the property exposure of the larger listed construction companies, we suspect), it is trading at 45% below levels seen in mid-2017, prior to the fall of the Barisan Nasional government,” the research firm says.

CGS-CIMB notes, however, that there is some pushback to its thesis that the construction sector should be given more attention by investors. The research house also agrees that actual implementation and critical Cabinet or parliament approvals were seen as slow.

“We sensed a degree of frustration that there was not enough urgency to kick-start catalytic projects, essential to achieving the prime minister’s Ekonomi Madani agenda,” it says in the note.

It adds that it is imperative that several project awards take place between November 2023 and March 2024 to generate greater confidence that the government is serious about taking the economy to the next level.

“We will be closely monitoring, among other things, the potential awards for Pan Borneo Sabah Phase 1B (RM15.7 billion), Sabah-Sarawak Link Road (RM7.4 billion), MRT3 (RM40 billion to RM45 billion), flood mitigation projects (RM11.8 billion) and Bayan Lepas LRT (RM10 billion),” it says.

While the value of work done remains relatively high, according to DOSM data, there has been deterioration in banking assets from the construction industry.

In the Financial Stability Review report for the first half of 2023, Bank Negara Malaysia highlights three small and medium enterprise (SME) loan segments that have seen increases in loans in arrears during the period. Loans to the construction sector are one of the vulnerable SME loan segments.

Loans in arrears from the construction sector had increased to 4.5% in June 2023, compared with 3.8% in December 2022. According to Bank Negara, loans in arrears refer to loans that are at least three months in arrears, equivalent to more than 90 days past due.

The profit margins of SMEs in the construction sector have been affected by elevated material costs, particularly for contracts awarded pre-pandemic under lower cost assumptions, CGS-CIMB says in a banking sector note dated Nov 16.

“Despite some contracts providing for price variation, such clauses may cover only selected materials and up to a certain quantum. While labour shortages have eased, labour costs remain elevated as firms compete for foreign labour with companies in other sectors, such as palm oil, manufacturing and F&B,” it says.

“In addition, delayed payments from contract awarders, coupled with tighter credit terms by suppliers, could cause some construction companies, especially smaller ones, to face cash-flow problems.”

In addition, CGS-CIMB is more concerned about the construction sector that it is with other sectors where loans in arrears had seen an increase over the six-month period from December 2022. This is because the construction companies have limited scope to pass through the significant increases in raw material costs to their clients, as the contract value would have been fixed before the hike in raw material prices.

“In this case, some of the construction companies could be stuck between a rock and a hard place — either they complete the projects at a loss or face legal action from the companies awarding them the projects,” CGS-CIMB says in the banking sector report.

Analysts whom The Edge spoke to concur that mega project roll-outs are essential to fiscally stimulate the economy. The need for the government to pump-prime through mega infrastructure projects is becoming more dire, as the economy is expected to be affected by the government’s subsidy rationalisation and the introduction of new or higher taxes in 2024, they say.

RHB’s Adam says that since the government already has political stability, it should quickly kick off the catalytic projects for infrastructure, as the long-term benefits from these projects outweigh the costs while setting the foundation for sustained growth, stability and development. 

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