Change in government could result in review of infrastructure projects


  • Corporate News
  • Saturday, 07 Mar 2020

Work in progress: A file picture showing work going on at a Pan Borneo Highway construction site in Sabah. Tenders for the three Pan Borneo Highway Sabah packages, earmarked under Budget 2020, were slated to be called by the second quarter.

The abrupt change in government has cast uncertainty over some big infrastructure projects, which were planned to be rolled out in the near future.

Before the political developments that saw the collapse of the Pakatan Harapan government and Perikatan Nasional (PN) assuming control at the Federal level, construction was seen as the bright spot to pump-prime the waning local economy.

An estimated RM146bil worth of contracts were slated to be rolled out from 2019 onward, including shelved catalytic projects such as the East Coast Rail Link (ECRL) and potentially the Pan Borneo Highway Sabah (PBHS) in the second half of this year.

Construction companies were eyeing projects such as these to replenish their order-books, while investors were watching out for earnings catalysts from new contract wins, in the hope that it would translate to positive share price reactions.

“There is now a risk of changes in (government) policies, which could result in possible reviews of projects. More so with the current economic climate having become more challenging since last month’s Covid-19 outbreak.” says an analyst.

He says PN, under the leadership of the newly-minted Prime Minister Tan Sri Muhyiddin Yassin, has a delicate balancing task of needing to exercise fiscal prudence and stimulus spending given the country’s continuous fiscal deficit and elevated government debt.

If it is any indication of how tough this balancing act could be, CGS CIMB Research says its “ground checks revealed that selected contractors vying for government-driven jobs indicated a general decline in tender book (total value of jobs in tender) since end-2019.”

One key observation was the slower-than-expected disbursement of government funds to kick off selected contracts under Budget 2020, it notes in a March 4 report.

“Investors, especially foreign ones will want to wait for more clarity on the political situation in the country where the new government could face a motion of no confidence in the upcoming May 18 Parliament sitting, ” the analyst reckons.

“Until then expect the mood to be dampened and cautious, ” he quips.

Historically, the KL Construction Index (KLCON) had also underperformed the market’s key index during previous periods of political uncertainty caused by changes in the Prime Minister or government.

Affin Hwang noted that when Pakatan took over in May 2018, the KLCON underperformed the FBM KLCI by 37% over a one-month period.

During the 2003 and 2009 political change-of-guards, the KLCON had also underperformed the market’s key index (then known as the KLCI), albeit by a smaller scale of 5 -7% over a one-month period (see chart).

When Pakatan came to po.wer, several big-ticket infrastructure projects were reviewed, resulting in cost cuts, plus the removal of the project delivery partner (PDP) role.

Investors sold down shares in construction stocks, but prices made a significant rebound in 2019 on the belief that the worst was over for the sector.

Under Pakatan, an open tender system was practiced in awarding public sector projects. It is uncertain whether this system would continue under the PH coalition, whose legitimacy to rule has been raised by some quarters given the manner it came to power.

At this point, among the long-awaited projects only the ECRL has kicked off with the awarding of about RM3-4bil contracts from the second quarter (2Q20) after the tender newsflow for Phase B (Dungun-Mentakab stretch) is wrapped up by the first quarter.

Going by a mid-Feb report, it is understood that land acquisition under Phase B was 80% completed, while public inspections for Phase A and C are ongoing.

Elsewhere, the Rapid Transit System (RTS) project is currently under deliberation between the Malaysia and Singapore governments with project details to be finalised by April. As for the Kuala Lumpur-Singapore High Speed Rail, both Malaysia and Singapore governments were to decide on the fate of the project by May.

Sarawak-related stocks

With Gabungan Parti Sarawak (GPS) throwing its support behind Muhyiddin,

Sarawak is likely to see additional federal funding support for the development of infrastructure projects in the state.

Sarawak is also due to hold its state elections by September next year – a prospect that would put Sarawak-related stocks on the radar as potential beneficiaries from more infrastructure spending in the state.

On the other end, the fate of the RM32bil Penang Transport Master Plan (PTMP) hangs in the balance. Recall that, SRS Consortium, in which GAMUDA BHD has a 60% stake, was slated to kick off early this year with the signing of PDP.

However, in a March 2 filing, Gamuda said the the validity of the Letter of award has been extended by the state government to August 31,2020.

Some components of the project, such as the Bayan Lepas LRT, relies on federal government guaranteed bonds to fund the construction.

And with the Penang state government becoming an opposition state, infrastructure spending for the state could be cut under the new government, reckon some.

As for Gamuda tolled highways buyout, a formal offer was to be made by end February. It remains to be seen whether the PN will proceed with the toll nationalisation or perhaps to revisit the proposed offer value.

On the East Malaysia front, tenders for the three Pan Borneo Highway Sabah packages - earmarked under Budget 2020 - was slated to be called from end-1Q20, while another project on the priority list of the previous government was the construction of MRT3 at an estimated revised cost of RM21bil.

When Pakatan came to power, several big-ticket infrastructure projects were reviewed, resulting in cost cuts, plus the removal of the project delivery partner (PDP) role.

Investors sold down shares in construction stocks, but prices made a significant rebound in 2019 on the belief that the worst was over for the sector.

Under Pakatan, an open tender system was practiced in awarding public sector projects. It is uncertain whether this system would continue under the new coalition, whose legitimacy to rule has been raised by some quarters given the manner it came to power.

At this point, among the long-awaited projects only the ECRL has kicked off with the awarding of about RM3bil-4bil contracts from the second quarter (2Q20) after the tender newsflow for Phase B (Dungun-Mentakab stretch) is wrapped up by the first quarter.

Going by a mid-Feb report, it is understood that land acquisition under Phase B was 80% completed, while public inspections for Phase A and C are ongoing.

Elsewhere, the Rapid Transit System (RTS) project is currently under deliberation between the Malaysia and Singapore governments with project details to be finalised by April.

Sarawak stocks

As for the Kuala Lumpur-Singapore High Speed Rail, both Malaysia and Singapore governments were to decide on the fate of the project by May.

With Gabungan Parti Sarawak (GPS) throwing its support behind Muhyiddin, Sarawak is likely to see additional federal funding support for the development of infrastructure projects in the state.

Sarawak is also due to hold its state elections by September next year – a prospect that would put Sarawak-related stocks on the radar as potential beneficiaries from more infrastructure spending in the state.

On the other end, the fate of the RM32bil Penang Transport Master Plan (PTMP) hangs in the balance. Recall that, SRS Consortium, in which Gamuda Bhd has a 60% stake, was slated to kick off early this year with the signing of PDP.

However, in a March 2 filing, Gamuda said the the validity of the Letter of award has been extended by the state government to Aug 31,2020.

Some components of the project, such as the Bayan Lepas LRT, relies on federal government guaranteed bonds to fund the construction.

And with the Penang state government becoming an opposition state, infrastructure spending for the state could be cut under the new government, reckon some.

As for Gamuda tolled highways buyout, a formal offer was to be made by end February. It remains to be seen whether the PN will proceed with the toll nationalisation or perhaps to revisit the proposed offer value.

On the East Malaysia front, tenders for the three Pan Borneo Highway Sabah packages – earmarked under Budget 2020 – was slated to be called from end-1Q20, while another project on the priority list of the previous government was the construction of MRT3 at an estimated revised cost of RM21bil.

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