THE construction sector is on the road to recovery but it will be a gradual one with bumps along the way.
Earnings of companies in 2023 are expected to remain muted, following a lacklustre 2022 due to a sluggish pace of job flows.
For one, potential policy review by the newly-installed unity government could delay the awarding of contracts of mega infrastructure projects by a few months.
Currently, the new federal government is reviewing flood mitigation project awards worth RM7bil that have been awarded through direct negotiations for possible procedural breaches.
Analysts say this is a negative development for contract outlook in 2023, but not totally unexpected.
Hong Leong Investment Bank (HLIB) Research notes in a report that of the ongoing infrastructure projects, Transport Minister Anthony Loke, while not going into specifics, mentioned that the East Coast Rail Link will continue.
“The sector’s only near-term catalyst – the Mass Rapid Transit Line 3 (MRT3) – was not specifically greenlighted,” points out HLIB Research.
According to analysts, there could be a possibility that the new government may want to review the costing structure and the alignment of the MRT3 project, given that it has yet to be awarded.
The year 2022 began with the construction sector seeing renewed investor interest following the reintroduction of the MRT3 project. However, the actual award of the contracts did not materialise in 2022.
Assuming a three to six-month review period, this could push awards to mid-2023 onwards.
For now, all eyes will be on the re-tabling of Budget 2023, likely in the first quarter of 2023, for more clarity on this project, which connects the existing MRT1 and MRT2 lines into one giant loop around the Klang Valley.
Given the government’s funding limitations, analysts say the introduction of new mega contracts and/or revival of legacy rail contracts such as the high-speed rail could be unlikely in 2023.
On the other hand, more development expenditures could be channelled to Sarawak, given that Gabungan Parti Sarawak is playing an important role in the current unity government.
On a brighter note, the easing of the labour shortage issue and the declining prices of building materials will provide some relief to companies.
That said, rising operating costs in the current inflationary environment would continue to put pressure on companies’ earnings growth in 2023.
It is no surprise that many research firms have a “neutral” rating on the construction sector in their recently released 2023 market strategy reports.
This is reflected in the performance of the KL Construction Index, which has risen only by about 1.9% year-to-date.
UOB Kay Hian Research notes that the sector is trading at 0.7 times 2023 forecast price-to-book or minus one standard deviation to its 0.93 times five-year historical mean, reflecting its uncertain prospects.