Budget 2016 will be more generous to Sarawak construction

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KUCHING: MIDF Amanah Investment Bank Bhd (MIDF Research) believes the upcoming Budget will be more generous to Sarawak’s construction sector, with a potential budget of more than RM5 billion.

According to MIDF Research, the increase in total projects awarded in Selangor and Wilayah Persekutuan (up RM11.77 billion), Johor (up RM5.03 billion) and Sarawak (up RM2.28 billion) illustrates continuous growth stemming from government policy implementation particularly in areas identified by Economic Transformation Programme (ETP), Government Transformation Programme (GTP) and 11th Malaysia Plan (11MP).

“Note that Sarawak’s budget for 2015 is RM4.28 billion and its development expenditure amounted to more than 83 per cent of the total allocation,” the research arm said.

It that the upcoming Budget 2016 will be more generous to Sarawak with a potential budget of more than RM5 billion.

Meanwhile, MIDF Research noted that the potential total value of government’s development budget for 2016 may not be less than RM50 billion with sizable allotments toward rural development and urban public transport initiatives, which are two of the National Key Result Areas (NKRAs) under the GTP.

It further noted that this is necessary in order to complete the GTP3.0 which runs from 2015-2020.

“It is notable that the GTP3.0 shall focus more on intra and inter-urban transport infrastructure and transit system such as BRT and KVMRT1, KVMRT2 and LRT3,” the research arm added.

MIDF Research did not expect the long-term emphasis on infrastructural development to fizzle out despite the recent volatility of crude oil prices and prevailing pressure on the Ringgit.

The research arm noted that among the main objectives of ETP, GTP and 11MP is to accelerate Malaysia’s growth towards a high income nation.

“Thus it is imperative that the infrastructure-centric policies to continue on until 2020 and even beyond,” the research arm said.

MIDF Research further noted as an example, the High Speed Rail (MyHSR) project from Kuala Lumpur to Singapore is arguably a testament to the potential continuation in infrastructure boon beyond the target completion of the ETP, GTP and 11MP in 2020.

It added that the MyHSR project is currently slated to be completed in 2022 with a behemoth budget of more than RM30 billion.

Overall, MIDF Research maintained its positive outlook stance on the construction sector largely in view of the ongoing and planned execution of government programs and policies.

The research arm noted that this is attested by the increase of 8.2 per cent year on year (y-o-y) growth in project awards during the second quarter of 2015 (2Q15).

“We reckon that the positive trend will continue in upcoming year due to planned infrastructure projects that will be implemented in Budget 2016,” it said.

MIDF Research maintained positive on the sector due to positive underlying dynamics based on the current on-going and planned roll out of various government projects, attractive average sectoral return on equity (ROE) of 15 per cent compared to average of 11.4 per cent for the market benchmark, relatively inexpensive valuation with average price earnings ratio (PER) of 11.54-fold and growing awarded projects year-on-year.

The outstanding orderbook and total revenue cover (outstanding orderbook/revenue) among the stocks under the research arm’s coverage were as follows: Muhibbah Engineering (M) Bhd (Muhibbah), IJM Corporation Bhd, Sunway Construction Group Bhd (Sunway Construction) and Gamuda Bhd (Gamuda).

MIDF Research was sanguine on the prospect of the sector with Muhibbah, Sunway Construction and Gamuda as its top picks.

The selection of the research arm’s top picks took into account of the fact that these companies have responded well in replenishing their orderbook and they possess strong fundamentals with niche construction capabilities.

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