Infrastructure spending is a necessary economic stimulus

UNTIL we are able to achieve the developed status as defined by the World Bank, Malaysia for the time being remains a developing nation with income levels that are of course growing but at a snail’s pace, especially among the B40 group.

The introduction of the new minimum wage of RM1,100 effective this year is still insufficient to address the widening income disparity between the have and have nots as the Pakatan Harapan government tries to narrow the gap. It is hoped that this will be raised soonest so as to enable the minimum wage level to reach at least RM1,500 to RM1,600 as the low income level of the B40 group means the government would continue to provide social safety nets for the needy.

Examples include the fuel subsidy that the government provides as well as Bantuan Sara Hidup (BSH) for qualified households. Indeed, a measurement of success for the government would be the reduction of number of recipients to the BSH programme and not an increase of total number of recipients.

Income level is also a function of job opportunities as if there are too many job applicants for a particular position, the negotiating power is with the employer and not the employee and this is evident at the lower end of the job market, mainly due to lack of opportunities today especially with the current lack of new infrastructure projects as the government’s finances are tight due to the previous administration’s way of defining what is actually debt.

According to a recent construction sector report by RHB Research dated Jan 3, the sector saw some RM9bil award of contracts for companies in 2018. Interestingly, companies under their coverage have some RM45.87bil in outstanding order book and based on these companies’ annual cumulative revenue of about RM15.75bil, the current orderbook to revenue ratio is about 3.2x.

This means the construction boys have enough jobs to sustain themselves over the next three years for good (i.e. assuming the same level of revenue) without securing a single job in the same period.

The data also shows that the current replenishment of construction jobs is lacking against the run of jobs being carried out at a rate of just 57 sen to the ringgit. In addition, the sector’s current order book has some long-tail projects whereby some projects’ contract awards are for longer periods and the market too will always like to see visibility among constriction boys and hence the need to sustain their respective order books.

The dismal level of jobs being awarded in the sector as well as doubtful nature of selected large infrastructure projects saw the construction sector emerging as the worst performing sector of 2018 as the Bursa Malaysia Construction Index fell by 50.2% last year. However, since the start of 2019, the index has recouped some ground as the index is higher by 11.2% year-to-date, based on the previous day’s closing level of 173.42 pts.

But the question is, where are the jobs? The Budget 2019 provided little details as to new infrastructure initiatives and worse, some of the big ticket projects were either cancelled or re-negotiated due to government’s limited financial capability.

However, now we are beginning to see that the Pakatan is re-looking at some of the earlier affected projects and with East Coast Rail Link (ECRL) now back on the radar, we hope that it will be a catalyst for the construction sector in 2019. But ECRL is a long tail project and of course it’s good for the economy if the reborn ECRL is well thought out where the cost benefit analysis justifies the spending.

Hot on the heels of ECRL will definitely be the High-Speed Rail project which again should be re-looked to ensure the long awaited connectivity with Singapore is an actual fact realised but it must again be done with greater scrutiny to ensure that the project is again more beneficial to both Malaysia and Singapore against the cost of the infrastructure project. The government also needs to be more transparent in these large infrastructure projects with funding details as well as revenue projections which are realistic and at the same time approved by Parliament via a Select Committee on Infrastructure.

There are 48 companies listed under the construction sector in Bursa Malaysia. Looking at the current levels, 38 of the companies are presently deemed as penny stocks, trading at less than RM1.00 per share while the sector’s market capitalisation is at RM29.69bil. As a whole, the cumulative book value of the sector is at about RM41.44bil and thus the construction sector is trading at a price-to-book multiple of just 0.72x.

Companies in the sector trade as low as just 0.12x book value, which include Zecon and Puncak Niaga, to as high as 3.45x for Sunway Construction. Thirty-eight out of the 49 companies trade at P/B multiple of less than 1.0x.

Only seven companies have market capitalisation of in excess of RM1bil each, of which three– Sunway Construction, Muhibbah Engineering and Kerjaya Prospek – are in net cash position ranging from 11% to 17% of their respective share prices. Thirteen companies or 27% of them have market capitalisation of less than RM100mil each and 21 others or 44% of the sector has between RM100 and RM500mil. Excluding Pimpinan Ehsan Bhd, which is on the lookout of a new core business, 80% of the companies have reported net profit in the latest cumulative quarterly period. In terms of balance sheet, 13 of them are net cash position.

With the world economy expected to see a challenging year ahead, infrastructure spending, if carried out in a disciplined and structured manner, can not only be beneficial to sustain economic growth but also ensure that the sector’s employment level is not impacted by lack of jobs while our listed companies in the sector is able to continue to maintain their strong growth performance. The construction sector is also a big economic multiplier due to the economy and hence for us to sustain our growth and to achieve developed status by 2022 or 2023, we need to continuously build our nation.

Economy , Pankaj , infrastructure