New levy for foreign workers to raise costs 11% to 25%

Government had given the final approval for the MRT Sungai Buloh-Serdang-Putrajaya Line (SSP Line) railway scheme

KUALA LUMPUR: CIMB Equities Research estimates the new RM2,500 annual levy for foreign workers the manufacturing, construction and services sectors will raise the costs by between 11% to 25% for each worker, which is deemed manageable.

Sector wide, labour cost roughly forms 20%-25% of total cost, it said on Tuesday. 

“As such, we estimate a 2%-4% EPS impact for contractors under our coverage.  Actual impact on bottomline depends on several scenarios.

“Guidance from contractors is that there should be an element of cost pass through, but it would depend on several factors. 

“For contracts that are in progress/outstanding, terms could be renegotiated through additional claims with the possibility of settlement during the final certification of works,” it said. 

The government announced that with effect from Feb 1, employers of foreign workers in these sectors would see the levy double from RM1,500 a year to RM2,500 a year.

CIMB Research said this doubling of the levy is a negative surprise for most contractors.

 The new RM2,500 annual levy implies a monthly cost of RM208, on top of the estimated industry average salary of RM1,300 to RM1,900 a month of a foreign worker. 

This effectively works out to an 11%-25% rise in foreign labour cost, which is deemed manageable. 

“Sector wide, labour cost roughly forms 20%-25% of total cost. As such, we estimate a 2%-4% EPS impact for contractors under our coverage,” it added.

CIMB Research said for contracts that are still in tender, pricing is typically adjusted if the bid is ongoing. In case of new tenders, new regulated cost structures such as higher levy for foreign workers will be usually priced-in.  All contractors are losers but some have better buffers  

Contractors that have jobs that are largely at the tail-end appear to be the least impacted, while contractors with relatively higher number of orders that have crossed 20-30% milestones are likely to see some margin squeeze before additional claims are recognised. 

“Under our coverage, Gamuda could be spared in 2016 as the tender for MRT 2 is still ongoing and its single-project order book for MRT 1 is at the tail-end. Muhibbah could mitigate the higher levy with US$ priced jobs in RAPID

“The new levy structure is bad news for the sector but should be manageable over time. 

“On the brighter side, following the announcement of the budget revision last week, most projects that are under the original list of Budget 2016 are largely intact. 

“Investors should focus on a potential major recovery in sector newsflow from 2Q16. We believe any share price weakness from this news would be a buying opportunity. Gamuda and Muhibbah Engineering remain our top picks,” it said.