Major construction projects awaiting government decision

4/5/2009 The Star
Edited

THERE is urgency for a heightened pace of construction works flowing to keep at least one economic component pumping hard. With a new Cabinet line-up and by-elections (almost) out-of-the-way, we anticipate a refocus on development priorities.

Of the RM7bil first fiscal stimulus unveiled in November, only RM2.4bil worth of projects was awarded as at April 17. Of this, RM350mil has been spent; the balance is still “work-in-progress”.

Plans are for a total RM5.2bil worth of projects to be awarded by June, and a full roll-out of RM7bil (38,000 projects) by August. Of the RM7bil first fiscal stimulus, we estimate the construction component to be RM4.6bil.

As for the RM60bil mini-Budget unveiled in March, RM15bil is fiscal allocation (RM10bil development, RM5bil operating), direct from the government’s coffers. The RM60bil mini-Budget offers RM11bil worth of works; the largest being the RM2bil LCCT, KLIA.

The 9MP, too, is not forgotten. Of the RM230bil 9MP allocation for development for 2006-2010, only RM119bil has been spent as at end-2008, implying a potential RM111bil spending over 2009-2010 assuming the RM230bil is maintained.

For 2009, government’s gross development spending was projected at RM56.7bil (2008: RM42.8bil) before imputing the stimulus allocations. Including the second fiscal stimulus package, this would reach RM60bil in 2010.

We expect a heightened pace of construction tenders and awards from mid-2009. Major projects awaiting decisions are the Pahang-Selangor water transfer (decided oredi May 2009, Shimizu-Nishimatsu-IJM-UEM consortium awarded the job - Ed) and Klang Valley LRT system. The government has clearly no problem in fund raising, without the distraction of a banking crisis, as in 1998.

Year-to-date, RM30.5bil worth of MGS-GIS has been issued, out of a total RM95bil estimated for 2009. Of the RM95bil, RM42bil is for refinancing while the balance RM53bil is new financing.
The RM30.5bil issued is already more than half of the official projected budget deficit of RM53.8bil for 2009. This should be sufficient for the immediate roll-out of construction packages.

More focus on east Malaysia
Higher allocations under the 9MP and second fiscal stimulus, and the new Cabinet line-up imply “urgency” for more infrastructure development in Sabah and Sarawak.
Of the RM10bil development allocation under the RM60bil mini-Budget, Sarawak has the highest allocation of RM1.2bil while Sabah’s allocation was the sixth largest. Sarawak Corridor of Renewable Energy (Score) and Sabah Development Corridor remain very relevant and we expect more construction works in Sabah and Sarawak.

We expect more positive news flow benefiting construction by mid-2009, with more mid-sized contracts of less than RM500mil each to lead the momentum for construction.
Top on the list of potential beneficiaries are contractors with long experience, excellent delivery track records and strong balance sheets to carry the weight of a turnkey contractor.
Our top picks for contractors of mid-sized projects are WCT and IJM Corp, which we upgraded to “buy” last week. Increasing momentum of works at Sarawak should benefit home-grown contractors like Hock Seng Lee (HSL) and Naim Cendera.We expect HSL, (outstanding order book of RM1.27bil), to record strong earnings growth in 2009 (+>20% year-on-year), while further job wins should sustain earnings into 2010.We upgrade HSL to a “buy”.
We also expect Loh & Loh to gain from water- and energy-related works under Score.
WCT and IJM Corp, which have built up good track records, could benefit in Sabah.
Gamuda remains known for its construction ability in mega projects – SSP3 in 1999 and SMART in 2002 - and we think Gamuda may play a lead role in the Klang Valley LRT works.

However, it is a little early to review our “hold” call on the stock.
Our TP is raised after removing a 20% discount to our unchanged RNAV of RM2.50/sh.