Challenging construction outlook ahead with weak job flows

Construction companies are expected to continue to see low overall margins in the second half of 2018 due to weak job-flow outlook, according to Hong Leong Investment Bank Research, The Edge reports.

Job flows are expected to slow down as a result of the downsizing of megaprojects, following the change in the federal government, with 2018 contract awards ending at RM15 billion—a steep decline from RM29 billion in 2017 and RM56 billion in 2016.

The total construction jobs announced on Bursa Malaysia from January to August 2018 amounted to RM10.5 billion and comprised mostly private-sector building jobs as opposed to public sector.

The spotlight may be shifting to Sarawak, which is expected to see more public sector projects. Its chief minister has mentioned a focus on state water and rural road projects, following the decision to shelve Kuching’s light rail transit project.

Funding for those projects is expected to come from Sarawak’s state reserves of around RM30 billion, which may insulate the projects from the risk of reduction of federal government spending. The Sarawak coastal road and second trunk road projects, with an estimated combined value of RM11 billion, are expected to open bidding in the near term.

The slow job-flow outlook also presents a risk of potential kitchen-sinking activities, which will hamper margins. Contractors may also increase spending for machinery upkeep following heavy usage over the past two to three years.

Nevertheless, contractors that are cushioned by healthy order-book levels following the robust job flows in the past two years are expected to ride the storm with sustained earnings. The upcoming Budget 2019 may also hopefully hold some good news for the sector in the near future. — Construction+ Online