Affin Hwang remains cautious on construction sector amid challenging outlook

  • Analyst Reports
  • Thursday, 04 Oct 2018

KUALA LUMPUR: The outlook for the construction sector remains challenging as the federal government is reviewing ongoing infrastructure projects to reduce costs by 20-30%.

Affin Hwang Capital Research said the MRT2 project's cost could be reduced by 25% to RM24bil.

It added that the MMC Gamuda joint venture would be the most affected as the main contractor for the underground section and the Project Delivery Partner (PDP) for the aboveground section of the MRT2.

Other contractors that could be affected include Ahmad Zaki, Gadang, George Kent, IJM Corp, MRCB, MTD ACPI, Mudajaya, SunCon, TRC, TSR and WCT.

"Since the cost reductions will come from the reduction in the scope of works, we believe only the contract values will be reduced while profit margins should be preserved."

The cut in LRT3 construction cost to RM9-10bil will most affect the MRCB-George Kent joint venture as the PDP for the project. Other affected contractors incude AQRS, IJM Corp, SunCon and WCT.

"We maintain our forecasts for MRCB as we believe we were conservative in our contract value assumption at RM9bn for the LRT3 despite the previous escalation in cost," said Affin Hwang.

Meanwhile, the research house noted that the Sarawak government plans to complete the upgrading of the Coastal Highway and trunks roads at a estimated RM11bil. POtential beneficiaries are Cahya Mata Sarawak and Hock Seng Lee.

In Penang, the transport master plan is pending approval by the federal government while public feedback collection is ongoing. The Pan Island Link 1 (PIL1) highway and George Town-Bayan Lepas Airport LRT is estimated to cost RM16bil with the Gamuda-led SRS Consortium as the PDP for the project.

"We reiterate our NEUTRAL call on the Construction sector as we remain cautious on the sector due to the risk of order book reductions with potential cost cuts for infrastructure projects," said Affin Hwang. Its top buys are IJM, SunCon and HSS.

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