Construction counters on a roll

UOB Kay Hian noted that post the 14th General Election (GE14) that saw Pakatan Harapan (PH) taking over the Federal Government, most construction and highway-concession related stocks have tumbled significantly, besieged by concerns of potential cancellation/deferment of some mega projects, contract renegotiation of ongoing mega projects, and toll road concessionaires being compromised.

PETALING JAYA: Construction stocks, led by IJM Corp Bhd and Gamuda Bhd, rallied yesterday on high hopes that several large infrastructure development projects, currently put on hold, would be revived soon.

Rakuten Trade Research said sentiment on the sector has turned positive, driven by news flows concerning the East Coast Rail Link (ECRL) and upcoming projects in Penang.

“Sentiment is becoming more upbeat on the ECRL, which is tagged at a massive RM35bil to RM40bil, as the project is touted to be confirmed anytime soon.

“Meanwhile, the Penang light rail transit and the Pan Island Link 1 will certainly shed light on the current government’s willingness to roll out projects to boost the nation’s economic activities.

“This also reinforces our strong stance on the construction sector, which should be the star performer this year,” it said in a report yesterday.

It is worth noting that many construction stocks have rallied since the beginning of the year, as investors have positioned themselves on the roll out of mega-infrastructure projects.

IJM Corp rose 5.5% to RM2.30, while Gamuda increased 4.8% to RM3.25 a share. On a year-to-date basis, both stocks have risen more than 41%, as talk of the ECRL project’s revival has been ongoing for the past couple of months.

Building material counter Ann Joo Resources Bhd, meanwhile, closed 8% higher to RM1.76 while Lafarge Malaysia Bhd fell 4.6% to RM2.49 yesterday.

Lafarge had earlier won contracts under the ECRL project before it was suspended. The ECRL project earlier had carried a price tag of RM55bil as announced in 2016 before ballooning to RM81bil as disclosed after the new government stepped in last year.

The FBM KLCI closed higher yesterday aided by telco and plantation counters. The index ended 2.54 points or 0.15% higher to 1,644.35, with 500 gainers, 386 losers and 383 counters remaining unchanged.

Regional markets were mixed, with the Shanghai Composite Index shedding 0.05%, CSI 300 losing 0.12%, Japan’s Nikkei 225 ending 0.21% lower and Singapore’s STI slipping 0.22%.

Hong Kong shares rose 0.47% and South Korea’s KOSPI ended the day flat.

On the ECRL, the construction of the 688-km long rail link was suspended last July after the new government found irregularities in the terms of the “lopsided” contract would cost between RM34.4bil and RM41.3bil.

The continuation of the project is expected to be ironed out by Prime Minister Tun Dr Mahathir Mohamad, who is scheduled to visit China from April 24 to 28 at the invitation of Chinese premier Xi Jinping to attend the second Belt and Road Initiative summit.

The rail link, if built, will connect Port Klang in Selangor with Pengkalan Kubor in Kelantan, and will be constructed in two phases.

Finance Minister Lim Guan Eng had earlier hinted that the ECRL project may be rerouted to Negri Sembilan. He had said that the project would be continued if negotiations on the project led by the chairman of the Council of Eminent Persons, Tun Daim Zainuddin, could reduce the cost of its construction further.

It has been said that the smaller-scale ECRL project would also see commitment by the Chinese government to buy Malaysian palm oil and bring in projects.

The ECRL project started off with an initial estimate of less than RM30bil in 2007. When the previous government signed the agreement with the main contractor, China Communications Construction Co Ltd (CCCC), in 2016, it was for only Phase 1 – from Gombak to Wakaf Baru in Kelantan – tagged at RM46bil. The cost of Phase 2, from Gombak to Port Klang, was another RM9bil.

On May 13, 2017, the previous government signed an additional agreement with CCCC to carry out Phase 2 of the project.

According to these figures, the basic cost of the project amounted to about RM66.78bil. However, it did not include the land acquisition cost, interest, fees and operating costs – which brought the final amount of the ECRL to a staggering RM81bil.