Earnings forecasts may be reversed with possible review of mega projects
THE fate of several of the country’s mega infrastructure projects has come into question, with the new Pakatan Harapan government having pledged in its election manifesto to review projects with foreign participation.
The coalition has deemed some of the mega projects in the pipeline as “wasteful” and unnecessary and has indicated potential investments into smaller-scale transport and utility projects instead.
With this potential review, the prospects of the many local firms which are also involved in these projects have also become uncertain.
While some companies have already been awarded work packages, others have seen their share prices gain in anticipation of being potential beneficiaries of these projects.
Analysts have also factored in some potential contract wins into their earnings forecasts for some firms – all of which may now be reversed.
Among the projects, initiated by the Barisan Nasional government, which are expected to come under review are the three mega rail projects – the RM55bil East Coast Rail Link (ECRL), the RM50bil-60bil KL-Singapore high-speed rail (HSR) and the RM12.9bil Gemas-JB rail double tracking project.
Combined, the cost of these three projects alone total over RM127bil.
Following the win of the Pakatan coalition, it is anticipated that the construction sector will likely see the biggest short-term negative impact based on the new ruling government’s manifesto.
The sector is expected to come under pressure due to fears of delays of contracts or even cancellations of some of these projects.
At this point, the ECRL, which has been awarded to China Communications Construction Company Ltd (CCCC) is about 13% complete, while the HSR, which is in cooperation with Singapore, has already seen the awarding of two project delivery partner (PDP) contracts worth a combined RM30bil-RM40bil.
The contracts were secured by the joint ventures (JVs) of Malaysian Resources Corp Bhd with Gamuda Bhd (MRCB-Gamuda JV) and YTL Corp’s Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd with TH Properties Sdn Bhd (YTL-THP JV), a subsidiary of Lembaga Tabung Haji.
The Gemas-JB rail double tracking, which is also China-led, has been awarded to China Railway Construction Corp, China Railway Engineering Corp and CCCC.
While the project has been approved, it has not been officially awarded yet.
Other mega infrastructure projects in the pipeline include the RM29bil Pan Borneo Highway which spans across Sabah and Sarawak, and the RM40bil-RM45bil MRT 3 (Circle Line).
Phase 1 of Pan Borneo Highway Sarawak, worth about RM16bil, has been fully awarded, while for the RM12.9bil Sabah portion, seven packages worth RM3.2bil have been awarded, leaving another 18 packages to be awarded, with an estimated value of RM9.7bil.
This project, however, is said to be the only one off the reform agenda, with the coalition saying the completion of the two highways will be prioritised.
Apart from vastly improving connectivity in Sabah and Sarawak, the project will benefit mainly local contractors.
CIMB Research analyst Sharizan Rosely says there could be downside risks to contractors’ order book replenishment across the board and overall sentiment on the sector could also deteriorate.
“Though it remains too early to assess the actual impact on construction contracts (new and ongoing) under Pakatan, its manifesto, if put into effect, would pose uncertainties on the outlook of job flows, cause delay risks to all the high economic impact contracts which have crossed critical stages of approvals and tenders, and cast a negative sentiment on the sector.
“Our view is that a review of all mega projects and a reform on the existing construction tender and procurement process could, at the very least, result in contract delays,” he says.
He adds that the continuity of contract awards could also be impacted.
Sharizan expects the top losers to be Gamuda, for its extensive tender exposure to MRT 3, HSR and highway concessions; YTL Corp for its exposure to HSR and the Gemas-JB rail double tracking; MRCB for its exposure to HSR and the Eastern Dispersal Link (EDL) and; Protasco for its exposure to government road maintenance and housing projects.
IJM Corp is also expected to be hit due to its exposure to highways and rail contracts.
Essentially, a review by the new ruling government could result in three scenarios for the projects -– status quo; renegotiation of contract terms, leading to a delay in the timeline of the project or; at worst, cancellation.
BMI Research, however, does not anticipate an outright cancellation of projects.
It says the cancellation or revision of large-scale China-backed infrastructure will pose downside risks to the country’s construction sector, which has grown at an annual average of 9% between 2013 and 2017.
“Although we do not believe that the new government will cancel projects outright, we note that there is an increased likelihood for construction – or financing-related delays as it reviews and potentially attempts to renegotiate contracts,” it says.
The coalition has stated in its manifesto that it will encourage continued investments from China and other countries, and that the reviews will mainly be to check weaknesses and corruption. While this should ease some of the concerns as it indicates that the coalition is unlikely to axe projects for the sake of cutting costs, the potential delays to these projects due to the reviews is likely remain the biggest concern for investors.
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