Roads? Highways? Trains? Energy? Which companies in Malaysia stand to gain from the Budget 2023 after election?
Malaysia is going to hold its general election on Nov 19. The commission said that the candidate nominations will take place on Nov 5, providing for a 14-day campaigning period.
The Malaysian Ministry of Finance also previously said that the tabling of the 2023 budget was not in vain as it will be re-tabled again after the general elections.
Quick Background – Malaysia Budget 2023
In the Budget 2023, the Malaysian government announced a higher development expenditure of RM95 billion in 2023 compared to RM71.8 billion in 2022.
The bulk of it goes to transportation (RM16.5 billion) and energy & public utilities (RM3.3 billion).
With the government continuing to fund big infrastructure projects such as Mass Rapid Transit 2/3, Light Rail Transit 3, Trans Borneo Highway, and East Coast Rail Link, several construction companies are expected to continue benefiting from them.
We dive into 5 stocks that you can buy to benefit from the government’s increased spending after the election…
#1 Gamuda Berhad
Gamuda Berhad (GB) is a major player involved in the engineering, infrastructure, property, water and expressway concessions industries in Malaysia.
It builds railway, highway, bridges, tunnel, water treatment plants, dams and other general infrastructure structures.
Most notably, it is the construction company for the MRT1 and MRT2 projects in Klang Valley.
GB could be the key beneficiary of the government’s budget 2023 for railway construction in light of the expected start of the MRT3 project. About RM3.3 billion is estimated to be allocated for MRT3 in 2023.
In terms of financial performance, Gamuda has gradually recovered in 2021 and the 1st quarter of 2022 (1Q 2022) from the disruption of construction activities due to the pandemic.
Revenue grew by 24.2% from RM3.1 billion 2020 (Jan 2020 – Jan 2021) to RM3.9 billion (Jan 2021 – Jan 2022), on the back of a resumption of MRT2 construction.
Meanwhile, profits doubled from RM308.5 million to RM728.6 million over the same period. This resulted in an increase of profit margin from 9.8% in 2020 to a strong 18.7% in 2021.
GB could be a worth investment opportunity for the following reasons:
- Accomplished track record as the main contractor for MRT1 and MRT2.
- High potential to successfully bid for MRT3 which is worth RM50 billion.
- Diversified business streams with involvement in other infrastructure segments and property development also.
Most analysts have GB on a OVERWEIGHT call, with an average target price of RM4.43. With share price currently at RM3.90, the implied upside is about 13.5%.
GB is currently trading at a price earnings ratio of 13.2 times, much lower when compared to the historical average (2018 – 2021) of 19.6 times. Its current dividend yield stands at 3.1%.
#2: Malaysian Resources Corporation Berhad
Malaysian Resources Corporation Berhad (MRCB) is involved in the property development and infrastructure construction industries. Its main segments include township building, property, railway, roads, high-voltage transmission, and environmental projects.
Notably, MRCB is currently involved in the construction of Light Rail Transit 3 (LRT3) worth RM31.7 billion, with about 74% completed as of June 2022.
Like Gamuda, MRCB has extensive experience working on railway projects and could effectively tender for projects like MRT3.
MRCB has effectively recovered from the pandemic also in 2021. Revenue grew by 20.8% from RM1.2 billion in 2020 to RM1.5 billion in 2021. Profits also rebounded to RM6.7 million in 2021 from a loss of RM175.9 million in 2020.
MRCB could be worth looking at for the following factors:
- Proven track record of delivering large infrastructure and property development projects.
- Rebound in profits. MRCB registered positive profits for 3 consecutive quarters.
- High upside potential in capital gains.
Markets are currently having an OVERWEIGHT call, with an average target price of RM0.40. With share price currently trading at RM0.30, this indicates an upside of 32.9%.
MRCB is currently trading at a price-to-book ratio of 0.96 times, below the typical 1 times. Furthermore, its dividend yield currently stands at 3.3%.
#3: Cahya Mata Sarawak
Cahya Mata Sarawak (CMS) is an investment holding company involved in the production of cement and construction materials, and also property development mainly in Sarawak.
It is probably the biggest producer of construction materials company in Sarawak, and has a near-monopoly position in the market.
With the government continuing to fund the Pan Borneo Sarawak and Sabah highway, CMS’s revenue outlook remains strong in the near future.
CMS’s revenue of RM814.6 million in 2021 has not recovered to its pre-pandemic level of RM1.7 billion in 2019. However, it has registered significantly better profit margins of 25.1% in 2021 compared to the historical average of 15.1%.
This presents an interesting shift in its operations. CMS’s profit of RM204.8 million in 2021 is comparable to the average profit of RM247.9 million from 2013 to 2019, but is generated on a lower revenue base.
CMS could be a good addition for the following factors:
- Dominant position in Sarawak, Malaysia.
- Eight-fold increase in road construction in Sabah from RM109 million in 2022 to RM817.9 million in 2023.
- Tripling of development expenditure for roads construction in Sarawak from RM70 million in 2022 to RM222 million in 2023.
- Pan Borneo highway allocation maintained at RM2 billion in 2023, similar to 2022.
- Cheap valuations.
Hence, CMS currently has a BUY call from analysts, with an average target price of RM1.22. This implies a potential upside of 49.7% from its current share price of RM0.82.
CMS is currently trading at a price earnings ratio of 4.6 times, lower than the 5.5 times in 2019. Additionally, dividend yield is currently at 2.5%.
#4: UEM Edgenta
UEM Edgenta (UEME) is a diversified services company providing highway and road maintenance, healthcare, property and facility services mainly in Malaysia.
It also operates in other countries such as Taiwan, Singapore, Indonesia, and UAE.
UEM Edgenta stands to gain from the high allocation for highway and road maintenance, and healthcare services. UEME’s main business is actually concentrated in healthcare services.
UEME’s revenue rebounded by 13.0% in 2021, after declining by 15.9% in 2020 during the pandemic. On the other hand, profits tripled to RM43.4 million in 2021 from RM14.4 million in 2020.
UEME could be worth a look for the following factors:
- Diversified business structure across different industries,
- High allocation for road maintenance and healthcare services in Budget 2023 in line with more roads being built.
- Potential for profits to recover back to pre-pandemic level of RM188.0 million in 2019.
Analysts mostly have a BUY call on UEME, with an average target price of RM1.57. This implies an upside of 48.1% from its current share price of RM1.06.
In terms of valuation, UEME is currently trading at a price earnings ratio of 17.7 times, with a dividend yield of 2.8%.
Conclusion
The Budget 2023 represents a budget that emphasises more development spending on infrastructure projects in 2023.
Most of the previous mega projects are still ongoing and will prove beneficial for the companies mentioned above.
While there is an uncertainty regarding the legitimacy of the Budget 2023 with parliament dissolved now, these projects are still expected to be implemented and continued for the next government.
