PETALING JAYA: Ambank Research has maintained its underweight recommendation for the construction sector despite the revival of the East Coast Rail Link (ECRL) project by the government.
This is due to the continued cutbacks in public infrastructure spending as the government tightens its belt and the prolonged downturn in the property market with oversupply in virtually all segments, comprising residential, commercial, office and retail units.
The research house remained negative on the construction sector due to the deterioration in cash flow along the entire value chain.
This was due to slow payment (or non-payment) by both public and private sector clients.
Ambank Research said some of these debts have escalated to defaults and contract disputes.
The Prime Minister’s Office today issued a statement announcing that the ECRL project has been revived via a supplementary agreement to be signed with China Communications Construction Company Ltd (CCCC).
The construction cost for the project has been reduced by RM21.5 billion to RM44 billion from the ealier RM65.5 billion.
“It is uncertain at this point what will be the extent of the local participation in the project (or if there is any change from the 30% share previously),” Ambank Research said in a research note released today.
It said given the sharply reduced project cost, in order to minimise loss in profits, it was doubtful if the Chinese contractor would offer substantial sub-contracting works to local players.
In the event it is required to do so, it is also doubtful if it will offer high-value jobs (such as tunnelling and construction of large bridges) to local players.
It also said that although the revival of the ECRL is positive to both the construction and building material sectors, it is no game-changer to these industries.
According to Ambank Research’s estimates, additional demands for cement and steel bars only amount to 1–2% of the current annual consumption of cement and steel bars locally for the project.
Factoring in the government’s strong commitment to fiscal prudence, the research house was concerned that this could be a “zero-sum game” as the revival of the massive ECRL project may deprive the government of its ability to implement other infrastructure projects over the next four to five years.
Ambank Research also said the market has already taken into account the expected reduction in cost of the ECRL, given the strong run-up in share prices of construction stocks over the last one to two months.