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Nikkei Markets

Malaysia's vow to review projects spooks construction stocks

Investors batter shares linked to past government, uncertain fate weighs

Malaysia's Former Prime Minister Najib Razak look at a model of the East Coast Rail Line at Kuantan Bahang, Malaysia in August 2017.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysian construction stocks are likely to fall further after investors hammered the sector amid a slew of downgrades as the opposition coalition, which had vowed to review projects worth over $25 billion, swept to power in a shock election outcome.

The Bursa Malaysia Construction Index, which tracks a basket of builders, has shed 12% since Monday - the share market was shut Thursday and Friday following Wednesday's poll - and could edge lower in the near term, analysts said. KAF-Seagroatt & Campbell Securities projects up to 10% downside for construction stocks under its coverage, including Fajarbaru Builder Group and Gamuda.

Among stocks which could be worst hit are YTL Corp. and WCT Holdings as these have benefitted the most in terms of bagging hefty contracts for large infrastructure projects that could come under the new administration's lens, analysts said. YTL dropped 3.7% Wednesday, dragging its weekly loss to 21.8%. WCT closed unchanged, down 29.7% for the week.

"The concern is that there will be delays for large projects and renegotiation of existing contracts, which could trim margins, impacting earnings," said Vincent Lau, vice-president at broker Rakuten Securities.

The benchmark FTSE Bursa Malaysia KLCI has gained 0.6%, while the ringgit has weakened more than 0.4% so far this week.

The Alliance of Hope coalition, led my nonagenarian Mahathir Mohamad had promised voters a "comprehensive review" of all mega projects that have been awarded to foreign countries, especially those linked to China.

Mahathir has also publicly questioned the necessity of projects such as the East Coast Rail Line that costs 55 billion ringgit ($13.87 billion) and the Kuala Lumpur-Singapore High Speed Rail that comes with price tag of around 60 billion ringgit.

YTL Corp., one of the two project delivery partners for the high-speed rail project, fell to its lowest in six years. The other, PDP is a consortium of Malaysian Resources Corp and Gamuda which fell 23.5% and 11.8% respectively this week. On Wednesday, Malaysian Resources lost 0.7% and Gamuda closed unchanged.

"Since the PDP contracts have not been signed, it is uncertain whether the PH (Pakatan Harapan, or the Alliance of Hope) will review the terms or the project implementation could be delayed," said Affin Hwang Investment Bank's analyst Loong Chee Wei.

Construction has been the fastest-growing economic activity although the sector accounts for less than 5% of gross domestic product. The previous administration had forecast the sector to grow 7.5% in 2018, supported mainly by infrastructure development such as the mass rapid transit project.

Once an agrarian economy, Malaysia has emerged as one of the most industrialized countries in the region as it channelled part of cash earned from oil exports to build roads, ports and other massive infrastructure projects including the iconic Petronas twin-tower.

Mahathir, who in his earlier 22-year stint as prime minister is often credited with transforming Malaysia into a wealthy state that is now home to several electronics parts manufacturers, had himself pushed for large infrastructure projects to spur growth. But he had also shown restraint during tough financial times when he prioritized projects that offered wider economic gains.

"Some companies were also perceived linked to the previous administration, for which investors assigned premium valuations," said Rakuten's Lau. "As we have seen in the previous sessions, this premium is now being taken off."

Earlier Wednesday, Bursa Malaysia set a floor price for George Kent (Malaysia), after its stock price more-than-halved over the previous two trading sessions. George Kent chairman Tan Kay Hock is reportedly close to former-Prime Minister Najib Razak.

T7 Global, among companies that bid for the East Coast Rail Line project, lost as much as 35.5% this week. The firm's board of directors includes Ahmad Syafiq Hazieq Ahmad Zahid, the son of Zahid Hamidi, Malaysia's former deputy prime minister under National Front government.

--Alexander Winifred

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