Construction sector: Safe haven amid uncertainty

LOCAL investors are exploring sectors less affected by foreign shocks as the world hopes for US President Donald Trump and his Chinese counterpart Xi Jinping to engage in negotiations soon.

The construction sector may fit the bill, say analysts.

Chong Tjen-San of CGS International (CGSI) Research explains that the sector could regain attention since it is mainly focused on the domestic market.

He opines that if a full-blown tariff war crimps Malaysia’s gross domestic product (GDP) growth, the government is highly likely to consider pump-priming the economy via the construction industry.

“Construction has a strong multiplier effect given its strong correlation with GDP growth, which was more pronounced at 2.8 to 4.6 times GDP throughout the first quarter (1Q) to 4Q24 compared to 1.2 to 2.3 times in 1Q23 through 4Q23,” Chong says in a research note.

He says channel checks by CGSI Research indicate the pipeline for data centre (DC) projects remains strong with more tenders and awards.

He anticipates that Sunway Construction Group Bhd (SunCon) will seize opportunities to expand its current DCs by 2Q25. Additionally, the group is pursuing six tenders for new clients.

Chong says Gamuda Bhd has set a conservative target for DCs, considering only three out of seven potential projects in 2025, as the group believes its key DC partners plan to accelerate more projects.

On the other hand, tenders for semiconductor factories have slowed considerably due to tariff uncertainties, putting the “China + 1” theme on hold, he adds.

“For government infrastructure, Gamuda’s potential RM3bil contract for the Penang light rail transit (LRT) increases the total contract value to RM8.3bil.

“This presents added orderbook opportunities for others like IJM Bhd and SunCon to take on subcontracting roles,” observes Chong.

Senior analyst at CIMB Securities, Mak Hoy Ken, is a shade more reserved, believing that a fiscal response from the government may be necessary to counter external headwinds amid an uncertain global macroeconomic environment.

“Much will also depend on federal subsidy rationalisation plans and attendant policies to support the B40 group.

“The unveiling of the 13th Malaysia Plan could provide a glimpse of the government’s latest stance regarding fiscal policies, while the upcoming Sabah and Sarawak elections may see more projects coming in,” he tells StarBiz 7.

Mak feels there could be renewed focus on private sector-driven projects under the Public-Private Partnership Master Plan 2030 to alleviate the government’s financial burden.

At the same time, he is expecting Malaysia to continue being a viable destination for advanced technology facilities, once there is greater clarity surrounding tariff negotiations.

“We advocate sticking to the big-cap construction names with a diversified market base and strong balance sheet,” he suggests, while keeping Gamuda as his top pick.

Edwin Woo of Hong Leong Investment Bank (HLIB) Research agrees with CGSI Research’s Chong on the construction sector’s “overweight” status. Woo highlights that Trump’s April 2 tariff announcement has had wide-reaching effects, potentially exposing the industry to second-order risks.

Second-order risks are indirect or downstream consequences that stem from initial actions, decisions, or events, known as “first-order” risks. These risks are often less apparent and emerge due to the ripple effects of the primary risk.

A good way to understand second-order risks is with an example: a company cuts costs by reducing staff (first-order risk: job losses). The second-order risks might include lower morale, reduced productivity, or the loss of institutional knowledge among the remaining employees.

Woo explains that the construction sector, being domestic-focused, is not directly impacted by tariffs or the 90-day implementation pause by the Trump administration. However, prolonged measures could increase second-order risks.

“The KL Construction Index has dropped by 4.3% since Liberation Day, adding to its year-to-date decline after the Diffusion Rule sell-off. Overall, we believe that higher risk premiums and negative wealth effects call for adjustments to our valuations,” he explains.

The US implemented the Diffusion Rule, a set of export restrictions on advanced artificial intelligence chips and software, effectively limiting their access to certain countries, particularly those in tier three such as China and Russia. The rule came into effect on Jan 13.

Woo also believes the government may support domestic-oriented sectors like construction to counter external weaknesses, noting that the industry offers the best “bang for the buck,” with the highest GDP multiplier of over two times due to its extensive economic linkages, especially with the manufacturing, logistics, labour and financing sectors.

“Under Budget 2025, projects worth RM9bil are to be delivered under the Private Financing Initiatives model. These projects could benefit from a faster rollout.

“Amid this trend of private sector reliance for infrastructure projects, we expect large-cap companies with substantial balance sheets to thrive.

“Construction companies like YTL Corp Bhd, Gamuda and IJM Corp Bhd, with significant financial capacity, are well-positioned to benefit under this regime,” he says.

Gamuda is a favourite among analysts, with Woo and Chong setting target prices of RM5.26 and RM6, respectively.