KUALA LUMPUR: AmInvestment Research sees the revival of the East Coast Rail Link (ECRL) as positive to both the construction and building material sectors but it is “no game-changer”
to these industries.
It said on Friday the the additional demands for cement and steel bars only amount to 1% to 2% of the current annual consumption of cement and steel bars locally.
“Also, given the government’s strong commitment to fiscal prudence, we are concerned that this could be a 'zero-sum game' as the revival of the still massive ECRL may deprive the government of its ability to implement other infrastructure projects over the next four to five years,” it said in its report.
The report was issued after the Prime Minister's Office announced the ECRL project would go ahead but the cost has been reduced significantly by RM21.50bil to RM44bil – this was a 32.8% reduction in the earlier cost of RM65.5bil.
Malaysia Rail Link Sdn Bhd (MRL) and the China Communications Construction Company Ltd (CCCC) had signed a supplementary agreement which would pave the way for the resumption of the ECRL.
The supplementary agreement, which covers the engineering, procurement, construction & Commissioning (EPCC) aspects of the ECRL, was achieved after months of negotiations between the companies involved as well as the Governments of Malaysia and the People's Republic of China.
AmInvestment Research said the market had also very much priced in the news, given the strong run-up in share prices of construction stocks over the last one to two months.
“Also after the run-up, valuations of construction stocks have become excessive with weight average FY19-20F price-to-earnings (P/Es) of 17.2 times and 16.3 times which are unjustified given the muted industry outlook.
“We maintain our underweight recommendation for the construction sector on the back of: (1) the continued cutback in public infrastructure spending as the government tightens its belt; (2) the prolonged downturn in the property market with oversupply in virtually all segments comprising residential, commercial, office and retail; and (3) the deterioration in cash flow along the entire value chain due to slow payment (or non-payment) by both public and private sector clients. Already, some of these receivables problems have escalated to defaults and contract disputes,” AmInvest Research said.
It also said that it was uncertain at this point what will be the extent of the local participation in the project (or if there is any change from 30% previously).
It also noted that due to the sharply reduced project cost, in order to minimise the loss of profits, it was doubtful that if the Chinese contractor would offer substantial sub-contracting works to local players, and in the event it is required to do so, if it will offer high-value jobs (such as tunnelling and construction of large bridges) to local players.