… plus soaring material cost

Latest data release by the Department of Statistics reveals slow
momentum of works recovery in construction in 1Q22 despite almost full
resumption of economic activities under the NRP P4 (since 18 Oct 2021).
New construction starts have also been lagging at just 5% of the total
works. At the same time, soaring material cost, especially steel
(nationwide) and cement (East Malaysia) will impact margins and do not
support new starts. We remain NEUTRAL on the sector.

Value of construction work down 6.1% YoY

The value of construction work done in the country was down 6.1% YoY to
MYR29.5b in 1Q22 as residential building and civil engineering works saw
slower momentum (-11.9%/-15.5% respectively), which off-set slightly
higher pace in the non-residential building segment (+4.2%). Compared
to pre-pandemic (1Q20) level, 1Q22 value was 15.9% lower. Public sector
funded work made up a smaller 39% of the total work value in 1Q22
compared to 45% in 1Q21/1Q20. Near-completion of the KVMRT2 project
should have partly contributed to this, we believe.

Cost up, in both civil and building work

Prices of steel bars (for civil works) are up 50+% YTD (till Apr 2022) in
Central Peninsular, while the steel unit price index (for building works) is
up 15%. Cement prices have inched up, by up to +5% YTD in Peninsular
Malaysia, but a higher 14% in Kuching (Sarawak) and 10% in Kota Kinabalu
(Sabah). Effective 9 Feb, cement selling prices in Sarawak have been
adjusted up by an average of 10% by CMS Cement, the sole supplier.
Aggregates (nationwide) and ready-mixed concrete (in East Malaysia)
experienced milder price hikes by up to 7% respectively, YTD.

Remain selective in our picks

As sector outlook remains challenging, we continue to prefer stocks with
strong balance sheet, delivery track record and ESG principles. IJM’s
balance sheet has strengthened post its sale of IJMP with net gearing
down to 0.28x end-Dec 2021. Gamuda’s net gearing is also low at 0.18x
(Jan 2022) while SCGB is at 0.2x (Dec 2021). Their strong balance sheets
will enable them to take on private sector funded projects anticipated
under the PPP 3.0 model. Our preferred BUYs are IJM and GAM. IJM, GAM
and SCGB also uphold strong ESG commitments.