Devex for FY21 was RM66 billion in which analysts believe some of these funds could possibly be diverted to fund on-going assistance packages announced during the FMCO such as the Pemerkasa+ and Pemulih programme. — Bernama photo
KUCHING: The current weak fiscal balance sheet will not bode well for the construction sector, analysts observed, as the rollout of future projects by the government are expected to be slower.
In a sector update report, the research team at Kenanga Investment Bank Bhd (Kenanga Research) pointed out that since the pandemic started in March 2020, the government has directly injected circa RM81 billion for all Covid-19 assistance packages.
It noted that the financial year 2021 (FY21) budgeted development expenditure (devex) was RM66 billion in which it believed some of these funds could possibly be diverted to fund on-going assistance packages announced during the full movement control order (FMCO) such as the Pemerkasa+ and Pemulih programme.
“Based on our in-house projections, the Federal government would hit a debt to GDP ratio of 64.8 per cent by year-end – above the statutory ceiling level of 60 per cent.
“Consequent to a weaker fiscal balance sheet, we think future projects being dished out by the government could see a slower rollout, be smaller in quantum or be more reliant on contractors utilising their balance sheet for funding private finance initiatives (PFI).
“We believe such scenarios are less market friendly. Hence, the longer the Covid-19 pandemic drags out, our conviction for the sector wanes,” Kenanga Research opined.
In tandem with the slower-than-expected recovery, it said contract roll-outs have been muted with little developments over key infrastructure projects.
Aside from that, it said, with the FMCO halting most construction works with exception to certain works which are allowed to operate at a maximum 60 per cent capacity; it foresee further earnings risks for contractors for the remainder of the year.
All in, Kenanga Research retained its ‘overweight’ rating on the sector. It said: “Despite the setback from the lockdowns, we still believe construction is one of the key sectors to benefit from an imminent re-opening play as the nation’s vaccination rate accelerates.
“That said, we prefer counters that have a predictable set of catalysts lined up coupled with robust execution and earnings delivery capabilities.
“These names include Gamuda, Kerjaya and Kimlun. That said, we note that our recovery thesis hinges over our nation’s rate of Covid-19 recovery.”