Budget to have ‘neutral’ impact on construction

PETALING JAYA: Budget 2024 lacks catalysts for the construction sector, according to analysts, as the fiscal deficit-minded government refrained from announcing any new mega infrastructure project.

The budget’s silence on the third line of the Mass Rapid Transit 3 (MRT3) and the Kuala Lumpur–Singapore High Speed Rail was also disappointing, as the market had been awaiting details on project implementation and contract flows.

This, however, is unlikely to derail the “mini-rally” of construction stocks this year, analysts said, considering resilient domestic demand and the easing of political uncertainties.

Year-to-date, the Construction Index of Bursa Malaysia is up by 23%.

To be fair to the government, Budget 2024 has not completely ignored the construction sector and it provided commitment that funding for previously announced projects will be continued.

It is noteworthy that Sabah and Sarawak were the top beneficiaries for development projects.

This includes the RM7.4bil Sarawak-Sabah Link Road Phase 2 project that will commence at the end of this year.

In his budget speech, Prime Minister Datuk Seri Anwar Ibrahim also announced that the tender process for the 19 packages of work for Phase 1b of the Pan Borneo Sabah project, costing RM15.7bil, will be completed by November 2023.

In Peninsular Malaysia, Anwar said the North-South Expressway from Sedenak to Simpang Renggam will be extended from four to six lanes at a cost of RM931mil.

Budget 2024 also revived the construction of five stations for the Light Rail Transit Line 3 (LRT3) that were previously cancelled. The resumption, which would benefit around two million residents, would cost RM4.7bil.

Fund manager Danny Wong told StarBiz that Budget 2024 would have a “neutral impact” on the domestic construction sector.

“There is no surprise from any new mega projects. The previously announced projects are priced in by the market.”

The chief executive officer of Areca Capital foresees a temporary setback for the construction theme on Bursa Malaysia, following the lack of catalysts from Budget 2024.

“It all depends on the implementation. Continued news flow about contracts related to the projects announced in Budget 2024 will keep investors excited,” said Wong.

TradeView Capital chief executive officer Ng Zhu Hann opined that Budget 2024 measures for the construction sector were not “significant enough” to excite the market.

However, he acknowledged that there were some positives from the budget for the sector such as the five new LRT3 stations and the flood-mitigation projects.

“The days of mega projects are not likely under the current administration, as the focus of the Madani government is towards projects for public good and infrastructures such as healthcare, education and irrigation,” he said.

Looking ahead, Ng believes that the construction theme is coming from a low base and that there are further opportunities for stock market investors despite the year-to-date rally.

“But investors have to be selective on listed construction companies, especially on their balance sheet health.

“Construction companies that win contract awards from foreign investors such as those setting up semiconductor facilities or data centres are preferred over those construction companies that are fully reliant on government projects,” he said.

UOB Kay Hian (UOBKH) Research analyst Lucas Tan Jun Sian has maintained his “market weight” view on the construction stocks, post-Budget 2024.

“Our ‘neutral’ sector rating is premised on a lack of visibility on the execution details regarding the rollout of mega projects amid fiscal constraints, despite a more stable domestic political landscape

“Our top pick remains Gamuda Bhd, backed by its robust order book with pronounced overseas jobs secured, which helps to mitigate the muted local contract flows,” he said in a report.

Tan pointed out that Sabah and Sarawak came out as the prime beneficiaries of Budget 2024, as both states will receive higher development expenditure of RM6.6bil and RM5.8bil, respectively.

He said Budget 2024 projects for Sabah and Sarawak could benefit companies that have prior involvement in various projects in the two states.

These include WCT Holdings Bhd, Suria Capital Holdings Bhd, Gabungan AQRS Bhd, Cahya Mata Sarawak Bhd and Hock Seng Lee Bhd.