Rising cement prices to pressure construction sector

Malaysia's construction sector is poised for a challenging year ahead, primarily driven by a significant 9.3% year-on-year increase in cement prices. This rise in material costs is expected to put pressure on the industry throughout the year.

Despite these cost pressures, Public Investment Bank Research (PublicInvest) maintains an "overweight" recommendation for the sector. The research firm cites a robust pipeline of new contracts and a resilient order book that continues to support short-term earnings. However, PublicInvest cautions that persistent increases in construction material costs could potentially squeeze profit margins, although the inflationary pressure is currently considered manageable.

The Malaysian construction sector is transitioning into a more moderate growth phase after experiencing exceptional growth rates of 20.2% in FY2024 and 12.5% in FY2025. The private sector remains the primary engine of this growth, accounting for RM30.5 billion, or 65.5%, of the total RM46.5 billion in construction work completed in the first quarter of FY2026.

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However, we warn that any continued increase in construction material costs could potentially put pressure on the industry's profit margins, although the inflationary pressure is still manageable for now.

Growth in the private sector is largely fueled by trade activities and the construction of non-residential buildings, specifically driven by the demand for large-scale data center development. This surge in data center construction is a key factor strengthening the sector's performance.

PublicInvest reiterates its "buy" recommendations for several key construction stocks, anticipating competitive target prices for large-cap companies like Gamuda Bhd. and IJM Corporation Bhd. due to their strong track records in managing large-scale public infrastructure projects. For small and mid-cap stocks, Kerjaya Prospek Group Bhd. is highlighted as a top pick, supported by its strong unbilled order book and consistent dividend payments. The firm expects national infrastructure projects, including the Penang Light Rail Transit, MRT3, and Large-Scale Solar 6 (LSS6), along with Tenaga Nasional Bhd.'s RM43 billion grid modernization plan, to continue driving the sector in the medium term.

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For the private sector, a growth of 13.2 percent driven by specific trade activities and the construction of non-residential buildings due to the demand for large-scale data center development is the main factor for this strengthening.