PETALING JAYA: The mass rapid transit three (MRT3) project is expected to bolster the construction sector going forward despite the low number of contracts in the first half of the year, according to Hong Leong Investment Bank (HLIB) Research.
“We continue to expect recovery in flows this year mainly driven by the MRT3 rollout in December 2022,” the research house said in a report.
Given that the MRT3 is private finance initiative or PFI-based, risks of delays to foot high subsidies this year may not be substantial, according to HLIB Research.
The MRT3’s three civil turnkey tenders, HLIB Research noted, could offer contracts valued at RM27bil.
HLIB Research believes the mega-project could take off by December 2022 assuming no general elections in between.
The research house noted the civil tender briefings were held recently and the timeline factored in the evaluation period.
“Thereafter, we would expect a string of subcontract awards in the first quarter of 2023 (1Q23).
“Given that the minimum payment moratorium period is two years, contractors with better balance sheets are significantly advantaged in tenders,” it said.
“Prior to the aforementioned mega job, we would anticipate the East Coast Rail Link or ECRL, Kuching autonomous rail rapid transit and snippets from various highway projects including in Sabah and Sarawak,” it added.
The research house also noted environmental impact assessment or EIA for the Penang South Reclamation project was also recently resubmitted in May, but progress to be award-ready could be further down the road.
Given the persistent cost pressures, the research house expects margins for contractors to have a significant impact.
“Some private sector contracts do have risk sharing clauses while public sector contracts with design flexibility have built in escalation clauses,” it said.
“However, we believe the majority of contracts are on a fixed lump sum basis,” it added. The research house believes another uncertainty is the dwindling labour supply as replenishment has been slow to come by.
Consequently, this may lead to further upward pressure on labour rates as the situation looks to remain unresolved for the remainder of this year.
“This poses further challenges in the MRT3 rollout considering the scale of the project. There is a potential for crowding out labour for non-MRT contractors,” it said.
The research house has maintained its “neutral” call on the construction sector on the back of soaring material cost that has impacted job flows and margins and possible event risk in the second half of 2022.
“We continue to expect sector coverage earnings to recover this year but we flag rising concerns over the deteriorating labour shortage situation,” it said.