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PETALING JAYA: Uncertainties remain over the timing of the launch of mega infrastructure projects in the country, although Sabah and Sarawak are more likely to see more construction activity next year.
Ongoing mega projects, notably the East Coast Rail Link, which is the sector’s only near-term catalyst, will continue, but Mass Rail Transit 3 (MRT3) is yet to be given the go-ahead.
Entering 2023, Hong Leong Investment Bank (HLIB) research expects modest earnings growth as most companies under its coverage returned to pre-pandemic rates in the second quarter of financial year 2022 (2Q22), so a higher base of comparison next year is a tougher grind.
This takes into account the slow pace of overall contract flows in 2022, it said.
For the companies covered, calendar year 2022 (CI22) cumulative earnings are said to be on track to increase by 95% (vs. 2021), given the low base, while cumulative earnings growth in CI23 reduced to an increase of 2.8%.
The slower projected growth stems mainly from the decline in the forecast for Gamuda Bhd
in CI23 due to toll delays.
In general, the upside risks to CI23 forecasts are faster-than-expected increases in new projects and margin expansion due to falling costs, the statement said.
HLIB Research added that its economics team believes there could be a possible reduction in development expenditure (DE) from the earlier peak of RM95 billion proposed during the 2023 budget, ahead of the 15th general election.
“The possible revised DE number could be around RM85 billion, including US$3 billion (RM13.3 billion) for MDB 1 bond repayment,” it said.
This would mean a flat “net” 2023 DE against the projected 2022 DE of RM71.8 billion.
Heading into 2023, given the constant lapses in actual payment of DE over the past few years, it is said not to be too upset by the lower headline numbers, but rather concerned about implementation due to the late adoption of the 2023 budget while changes in the procurement process may slow down business flows.
HLIB Research expects that most of DE’s focus in the upcoming budget will be on flood mitigation, hospitals, water and various infrastructure projects in Sabah and Sarawak. The fate of MRT3 will also be revealed in the budget announcement.
The research house did not change its “neutral” view on the sector for 2023.
It said its cumulative earnings forecasts for 2023 call for growth of a subdued 2.8%.
Key catalysts for the sector’s re-ranking include MRT3 news flow and contract wins.
It cites the risks as the cancellation of the MRT3, prolonged high material prices, labor shortages and political instability.
HLIB Research’s top picks for the sector are Gamuda Bhd and Sunvai Construction Bhd due to their lower reliance on domestic public infrastructure.
A stronger development focus is expected in both states of Borneo. Sabah and Sarawak were allocated DE of RM6.3 billion and RM5.4 billion respectively in the previous federal budget and the upcoming budget is expected to at least match this one.
It does not anticipate major setbacks in ongoing or new projects such as the Sarawak Pan Borneo Expressway, the Kuching Autonomous Rail Transit, the Sarawak-Sabah Expressway, the trunk road and port expansion.
Another state that could fare better is Penang, but near-term developments could be limited to critical raw water and airport expansion projects.
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