Malaysian building material firms,contractors to gain from ECRL revival

Posted on 22 February 2019
 

Source: The Star Online

The potential revival of the East Coast Rail Link (ECRL) will not only benefit local construction players, but there will also be positive spillover effects on building material companies in Malaysia.

According to UOB Kay Hian, for one, local contractors would gain if the ECRL project is resumed as the government had reiterated its preference to have greater participation from local construction companies under a new deal as compared to the previous structure, which was dominated by Chinese contractors.

“While it is premature to gauge the contract model and value, we believe there are a few key beneficiaries of this project, thanks to the continued support from the government’s aspiration to increase local contractor participation for the construction of the ECRL,” UOB Kay Hian said.

“If the ECRL project works resumed, steel and cement companies would be able to see an earnings uplift,” the brokerage added.

Finance Minister Lim Guan Eng yesterday said he was optimistic that Malaysia and China could finalise a deal to revive the ECRL by April this year.

He said talks were ongoing with China to reduce the cost of the project and that a final decision would be made by the time Prime Minister Tun Dr Mahathir Mohamad visits the country in April.

“We’re hopeful the matter can be revived and that China will meet our request for a price reduction,” Lim told reporters yesterday during the 12th Malaysian Property Summit 2019.

Lim’s comments followed a Bloomberg report on Tuesday which stated that Malaysia and China were near a deal to revive the ECRL project. Quoting Foreign Minister Datuk Saifuddin Abdullah, the report said China was willing to reduce the US$20bil (RM81.6bil) price tag, with talks now “in the last mile”.

Estimated to cost a hefty RM81bil under the original deal, the 688km rail link, if built, would connect Port Klang in Selangor to Pengkalan Kubor in Kelantan.

In its report yesterday, UOB Kay Hian named Gabungan AQRS Bhd as one of the key beneficiaries of the potential revival of the ECRL. It noted that AQRS had previously tendered for three packages along the stretch in Kuantan with a tender value of RM2.5bil.

“We strongly believe AQRS is one of the clear beneficiaries on the back of a longstanding relationship with the main contractor, China Communications Construction Company, and the tendered rail line alignment packages, which are adjacent to the state administrative centre (in Kuantan) which is currently being constructed by AQRS,” UOB Kay Hian explained.

Other potential winners, it said, would include Sunway Construction Group Bhd, IJM Corp Bhd, Malaysian Resources Corp Bhd and WCT Holdings Bhd, given their proven track records for the construction of rail-work jobs.

As for building material companies, if the project still largely involved elevated structures, steel companies such as Ann Joo Resources Bhd would be a key beneficiary, UOB Kay Hian said.

Otherwise, cement companies such as Lafarge Malaysia Bhd, YTL Cement Bhd and Hume Industries Bhd would benefit from sub-structure works, while other players such as Prestar Resources Bhd could benefit from guardrail works as it commands a 50% market share in the local guardrail business.

Meanwhile, an analyst with a local brokerage said the revival of the ECRL would help revive sentiment towards the local construction sector, which has been a major casualty after Pakatan Harapan came into power last May because of the new government’s decision to either postpone or cancel major infrastructure projects in the country.

“Progress in the ECRL deal is definitely good news... if the project is revived, there would be opportunities for local players to expand their orderbook, and this, in turn, would help revive sentiment towards the local construction sector,” he explained.

As it is, the construction sector has seen a “mini rally” since news broke that Malaysia and China were making progress in talks to revive the ECRL.

Since Tuesday, the Bursa Malaysia Construction Index (KLCON Index) has gained 8%.

The KLCON Index rose 1%, or 2.09 points, to 192.44 points yesterday.

In its recent report, Maybank Investment Bank noted that despite the limited downside risk, the local construction sector is waiting for a positive re-rating catalyst to boost sentiment.

The brokerage said the potential revival of the ECRL could be a kicker the sector needed for a potential re-rating. That said, it stressed, the devil would lie in the details of the awarded contracts. 



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