THE construction sector is expected to fare better in 2013 compared to 2012 on the back of numerous projects in the pipeline. These projects are expected to benefit various players and stakeholders across the ecosystem.
On the downside, is the buzzword “political risk”, which seems to be casting a shadow over the industry, due to the impending 13th general election (GE).
Matthew Tee, president of Master Builders Association Malaysia (MBAM), says: “The construction industry has fared well in 2012 on a year-on-year basis, with a growth in excess of 20%.
“In Budget 2013 presented by the Prime Minister, we are looking at 13% growth this year.”
The gross development expenditure is projected at RM47.8bil, down 4.2% vis-vis RM49.8bil estimated for 2012, RHB Research says in a report.
The research unit says construction gross domestic product is projected to remain robust at 11.2% in 2013 contributed by the proposed RM6bil Private Financing Initiatives 2-driven projects, large-scale infrastructure and property development projects, investment in the oil and gas segment and house construction activities.
At the beginning of 2012, MBAM expected the construction sector to grow to RM92bil from RM85bil in 2011.
Says Tee: “Looking at results up to the third quarter, it is very unlikely that we will hit the RM92bil mark expected. We hope for a quicker rollout of the projects under the government and private sectors.”
In a note to investors, CIMB Research analyst Sharizan Rosely says the delay in the signing of the RM7.1bil West Coast Expressway, the award of the RM3bil-RM4bil Kinrara-Damansara Expressway and the slowdown in the rollout of the Rubber Research Institute tenders had led to the slight deceleration in the momentum of awards in the second half of 2012.
Going forward, Tee says the drivers in the industry include the awarding of mega projects such as the mass rapid transit (MRT), light rail transit (LRT) and initiatives under the Economic Transformation Programme (ETP) by the Government, and their full-scale implementation.
WCT Bhd deputy managing director Goh Chin Liong believes the industry will further expand with the rollout of several high-impact projects in 2013.
“As for the Middle East, we remain upbeat on markets such as Qatar and Oman, which will see further rollouts of infrastructure projects as economic diversification remains a top priority for the region.
“WCT's construction teams will be busy with projects such as Gateway@KLIA2, the office building of the International Trade and Industry Ministry in Kuala Lumpur, the Qatar government administrative building, the Paradigm Towers and 1Medini in Iskandar Malaysia,” Goh says.
In 2012, the country had seen the implementation of key projects in the likes of the KLIA2, MRT Line 1, Light Rail Transit Extension, Pengerang Rapid and the widening of the PLUS Highway, he says.
Sunway Group's construction division managing director Kwan Foh-Kwai expects a busier year ahead upon the execution of the bigger order books secured by most players.
“I expect the momentum of implementation of approved ETP projects and in the growth corridors to sustain the industry's growth. Furthermore, we hope some of the 1Malaysia People's Housing Scheme (PR1MA) projects announced by the Government, including those in the various states, to kick off in a big way,” he says.
Catalysts and challenges
For 2012, the ultimate challenge the industry faced was the shortage of a skilled workforce. Tee foresees this to be a continuing problem entering 2013.
All the other respondents concur.
“Catalysts for 2013 would be the quick implementation and award of mega projects such as the second lineof the MRT, ETP-related projects, Wawasan Merdeka, the Tun Razak Exchange, the River of Life project and the Southern Double Track, to name a few.
“The risk would be the actual implementation of these projects, as sometimes bureaucracy can delay the physical implementation of a project,” Tee adds.
Kwan says possible challenges include delays or a derailment in approval and implementation of projects, while the period to obtain construction permits in some states for foreign direct investment may be too long.
Many players anticipate the announcement of more mega projects such as the second and third lines of the MRT, which is estimated at RM40bil by CIMB Research.
Mass Rapid Transit Corp Sdn Bhd chief executive officer Datuk Azhar Abdul Hamid says the Land Public Transport Commission is carrying out the feasibility study now and expects it to be completed by the third quarter of 2013.
“It is still difficult to say at this moment. Awards will probably only start early-2014 subject to the project management method chosen,” he explains.
On the industry outlook, Azhar says it should continue to be good but players who compromise on quality and good planning or execution will find it challenging.
“Work will be aplenty on all fronts, including the MRT, but resources, especially skilled workers, will be a challenge. With (our gross domestic product) growth of more than 5%, Malaysia is better positioned than most (countries),” Azhar adds.
CIMB Research's Sharizan says: “While actual awards for the second and third lines of the MRT can only occur after the general election, progress in the signing of the West Coast Expressway, the award of private financing initiative building projects and other highways could take centre stage in the first half of 2013.”
The analyst opines that these should provide catalysts for a sectoral re-rating and maintains a “trading buy” and not “overweight” call on the sector due to the election risk.
MBAM's Tee notes that if all the projects were to take off, the shortage of skilled labour already faced by the industry will escalate further.
“Wages for skilled workers have increased in the range of 20% to 40%, while those of general workers have increased by 20% to 30%,” he says.
Kwan says construction costs will increase due to labour shortage, while Goh agrees that the increased number of construction activities in the country may inflate labour costs.
Bolton Bhd executive director Chan Wing Kwong, meanwhile, says the booming development in Indonesia has led to a shortage of Indonesian labourers coming to Malaysia.
He says the problem is mitigated by hiring labourers from other countries like Bangladesh, but they lack the specialised skills and communication edge that Indonesians have.
On the trend of building material costs, Tee says prices have been generally stable in 2012 but expects an increase in 2013 due to the growth of the sector.
“We hope the Government will accede to MBAM's request to reduce import duties on heavy machinery, which the industry has been requesting since 2006 as this will improve productivity and quality,” he says.
Sunway's Kwan opines that certain locally produced building materials, particularly quarry products, may see an increase in prices due to an expected bottleneck in supply to meet the higher demand. He expects global prices of major building materials and fuel to remain stable.
“The minimum wage requirement will result in suppliers of goods and services passing on the additional costs to us,” Kwan adds.
Meanwhile, Goh says: “We do not expect the industry to experience hyper-inflationary prices like what was seen in pre-2008.”
RHB Research notes: “We expect a muted outlook for the global steel sector in 2013. While we believe the current cycle has bottomed out, we only expect the green shoots of recovery to emerge on the horizon earliest in 2014.”
Local prices for the other main material for construction, cement, is expected to remain relatively stable at the current level of RM285-RM300 per tonne (net of rebates) in 2013 to 2014, the research house adds.
RHB Research is keeping its forecast of a 5% growth in domestic cement demand, which allows cement players to “ςex their pricing muscle to boost proρtability”.
The political factor
One of the concerns for the sector is its politically-sensitive nature. Analysts, however, have mixed views on how the GE is going to impact the sector. They have different calls ranging from “neutral” to “overweight” on the sector.
Tee says: “The upcoming elections will have a great bearing on the growth of not only the construction sector but across all business sectors, as many investors are holding back and adopting a wait and see' attitude.”
RHB Research says it believes investors will refocus on the fundamentals of construction stocks that may appear to be reasonably attractive, underpinned by a construction upcycle backed by various large-scale oil and gas, infrastructure and property projects post-GE.
Against the backdrop of possible higher costs which pressure operating margins, players will adopt strategies to ensure that they remain profitable.
On margin management, WCT aims for efficient project management while Sunway's Kwan says any periodic inflationary and cost-pushed factors could be smoothened or evened out by pricing strategy in new contracts.