Malaysia contractors set for lower margins

Construction sector downgraded as government grows more prudent with spending

As the current administration continues to cut back on infrastructure spending, contractors in Malaysia are facing lower-than-anticipated margins in the next term, according to UOB Kay Hian Research.

Margins for the construction sector are poised to hover only in the range of five to six percent, down from the earlier projection of eight to 10 percent, the research house predicted.

It also downgraded the sector to underweight. “For most of the contractors who rely heavily on government tenders, their order books are depleting as progress billings are recognised, but they are unable to replenish order books,” the consultancy stated in a note issued yesterday, per The Star Online.

Major infrastructure projects from the previous government have been placed under greater scrutiny since the Pakatan Harapan came into power this year.

Led by reelected Prime Minister Mahathir Mohamad, the coalition has led a chorus of voices criticising the cost and feasibility of several projects announced under his embattled predecessor Najib Razak.

Some contractors have resorted to monetising idle land banks for property development or diversifying to focus on order book replenishment from parent or sister companies.

“This strategy may cushion the ‘foregone earnings’ from replenishment and provide earnings visibility in the near term,” UOB Kay Hian analysts noted.

“However, the contract flows from this strategy may not be enough to offset the loss of government projects for certain contractors as government tenders are usually sizeable.”