PETALING JAYA: Construction firms in Malaysia are bracing for lingering cost pressures as the fallout from the US-Iran conflict continues to ripple through global energy and materials markets.
Diesel prices in Peninsular Malaysia have surged by around 85% from RM2.99 a litre in mid-February 2026 to RM5.52 a litre by the end of March, while coal and other building material costs are trending higher, albeit at a slower pace.
According to MBSB Research, while the sector could withstand the shock, particularly larger contractors with diversified project portfolios, there would be an impact on their margins.
“In our base case, we expect the impact to stabilise within one to two months; however, cost pressures are expected to persist into the second quarter of financial year 2026 (2Q26) to 3Q26 due to lag effects from earlier cost hikes, before normalising beyond 3Q26,” it noted.
The research house estimates a 30% to 35% increase in building material costs could lead to a net margin erosion of two to five percentage points if 20% to 30% of contracts cannot fully pass incremental costs to clients.
Despite this, MBSB Research believes margin pressures on major players are manageable under a short-lived crisis.
The research house noted that government subsidies to ease fuel costs provide only partial relief.
“Rigid tipper lorries, including 10- and 12-wheelers, are excluded from current subsidy programmes, leaving operators exposed to full market fuel prices that have more than doubled in a short period,” MBSB Research highlighted.
This could create operational hiccups, potentially delaying project timelines and inflating budgets, particularly for infrastructure projects under the 13th Malaysia Plan (13MP).
Larger contractors benefit from contractual protections such as variation-of-price clauses and cost-plus arrangements for higher-value projects.
MBSB Research points to Gamuda Bhd
and IJM Corp Bhd’s overseas exposure – roughly 60% and 45% of their respective RM44bil and RM8.2bil order books – which mostly operate on a cost-plus model.
Domestic projects typically include cost buffers, especially those funded by government contracts.
For Sunway Construction Group Bhd (SunCon), MBSB Research sees even greater resilience.
“Most fixed-price projects are already 50% to 60% completed, limiting further cost inflation exposure,” it explained.
Conservative accounting and a roughly 50:50 split between cost-plus and fixed-price contracts provide additional cushioning against external shocks.
Coal-dependent Malayan Cement Bhd (MCement) is expected to fare reasonably well due to stable Indonesian coal prices.
“As coal accounts for approximately 40% of the cost of goods sold, price fluctuations have a meaningful impact on margins,” MBSB Research said, noting the company procures coal on a two-month forward basis, making near-term cost risks more demand-driven than price-led.
Despite these challenges, MBSB Research maintains a positive outlook for the sector, citing strong private sector demand, multi-year public infrastructure projects under 13MP, and sustained digital infrastructure growth.
Its top picks include Gamuda (target price or TP: RM5.60), SunCon (TP: RM7.30), IJM (TP: RM3.10) and MCement (TP: RM10).
Overall, MBSB Research said the sector’s earnings visibility is expected to remain firm, underpinned by sizeable contract awards secured in 2025 and the continued rollout of mega projects.
It noted that contract awards reaching RM225.5bil in 2025 provide a solid foundation for earnings in the financial years 2026 and 2027.
“Amid solid development progress, we saw some signs of moderation such as reduction in development expenditure under Budget 2026 to RM81bil (minus 5.8%) due to fiscal consolidation and slower than expected roll-out of major infrastructure due to intense lobbying.”
“As such, we are cautiously optimistic on the sector in 2026, underpinned by intact mega-infrastructure and data centre roll-out, partially dragged by project delay and building material cost inflation,” added the research house.
Meanwhile, one analyst said while the headline contract awards look encouraging, the market may be underestimating execution risks.
This is particularly the case as fiscal consolidation tightens government spending.
Delays are also continuing to creep into key infrastructure timelines amid uncertainties, especially stemming from the geopolitical tensions in the Middle East.
“The data centre boom is supportive, but margin pressures from rising material costs and labour constraints, which could weigh more heavily on smaller contractors lacking scale and pricing power, remain a concern for the sector,” the analyst added.
