Published June 10, 2009

Malaysian construction sector makes comeback

Accelerated spending driven by economics and politics

By S JAYASANKARAN
IN KUALA LUMPUR

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MALAYSIA'S construction sector is coming back with a vengeance as the government accelerates spending to counter the downturn.

On a high: The key driver is the accelerated spending which seems to be driven by PM Najib Razak

According to Jon Oh, an analyst with CLSA here, the sector could have outperformed the broader market index by as much as 30 per cent over the last three months.

There are other reasons for the rekindled interest including the fact that construction firms have returned to the black: infrastructure builder IJM, for example, posted RM290 million (S$120 million) in net profit for its 2008 financial year from a loss of RM421 million the year earlier. In addition, falling materials' prices also imply larger margins.

But the key driver is the accelerated spending which seems to be driven by Prime Minister and Finance Minister Najib Razak. In late May, for example, the government awarded a RM1.3 billion tunnelling project to a Japanese- Malaysian consortium of companies, including IJM, to kick-start the Pahang-Selangor interstate water transfer project that was first announced five years ago.

The RM5-8 billion project is an ambitious, and environmentally contentious, project to transfer water from a newly created dam in Pahang through a tunnel in the Main Range of mountains and piped from a newly created water treatment plant to end-users in Selangor.

It was deemed necessary in 2004 after studies showed that the demand for water in the Klang Valley, Malaysia's most industrialised hub, would outstrip supply by 2014.

Malaysia's poor fiscal situation put the project on ice but the downturn and the ascendancy of Mr Najib, who is from Pahang, seems to have given the project a new urgency.

The new emphasis on accelerated spending is partly driven by the need to prevent a hard economic landing for Malaysia which entered recession in its first quarter.

But it's also political: the ruling Barisan Nasional is under severe pressure from the opposition and needs to shore up public support by demonstrating a firm hand on the economy ahead of general elections in 2013.

On the water project, the construction industry is interested because only the tunnelling works have been awarded.

The Pahang portion of the contract - the dam, piping and the tunnelling - are likely to be dominated by Japanese contractors as it is being funded by a US$1 billion loan from the Japan Bank for International Cooperation.

Even so, AMMB Banking Group picked Loh and Loh (a Malaysian dams' specialist) and JAKS Resources (a pipes supplier) as likely beneficiaries for sub-contract work.

There is an estimated RM2.3 billion worth of contracts still to be handed out on the Pahang portion of the works.

Around RM4-5 billion worth of work is up for grabs on the Selangor side, which will have to be awarded soon, so that both sides can meet the 2014 deadline seamlessly.

This portion, however, is to be government-funded so all the work will go to local contractors.

For this, AMMB picks infrastructure specialist IJM, Gamuda, Loh and Loh and, once again JAKS as the major beneficiaries.

But water isn't the only thing Malaysian construction firms are eyeing. Under government plans to improve urban transport, state agency Prasarana has been tasked with spending RM35 billion to improve public transport in the Kuala Lumpur area by extending Light Rail Transit and bus networks.

So far it is still in the design state but Prasarana has announced that it will go to the market to raise an initial RM4 billion to kick things off. Cumulatively, the news-flow has caused a buzz in the industry.