Highlights

• Budget 2027 provides a higher development expenditure of RM83b, but there is a limited visible pipeline for construction companies under our coverage.
   
• The reinstatement of VOP may relieve the cost impact for smaller contractors, while the impacts from the minimum wage hike are fairly manageable for large-cap contractors under our coverage.
   
• Maintain OVERWEIGHT; top picks are Gamuda, IJM, Suncon, Binastra and Kerjaya.
   

Analysis

• Development expenditure of RM83b earmarked in Budget 2027. Budget 2027 reaffirms the government’s commitment with RM83b in development expenditure (+2.5% yoy). Including RM11b in public-private investments, RM14.2b of federal statutory bodies investments, and RM25b from government-linked investment companies, public development expenditure for 2026 will be RM133.2b (2026: RM131.8b). The larger development expenditure supports an expansionary spending stance, and shall continue to support a healthy domestic infrastructure project pipeline.
   
• Key highlights for the sector. Some of the key infrastructure projects highlighted are: a) Johor’s elevated autonomous rapid transit (E-ART) project; b) National Non-Revenue Water programme (RM2.5b); and c) various flood mitigation projects. There was a lack of new mega projects announced, which implies an absence of a visible pipeline for the construction companies under our coverage.
   
• Reinstatement of VOP may alleviate rising cost pressure. In Budget 2027, the government also reactivated the Variation of Price (VOP) clause for diesel and bitumen cost increases. This allows selected projects valued up to RM5m using the Malaysian Public Works Department’s pre-approved plans to proceed through quotation procurement. The VOP will allow the government to partially cover increases until the applicable government-related projects are completed. We are of the view that this will relieve the cost impact for smaller contractors with infrastructure-focused orderbooks.
   
• Manageable cost impact from minimum wage hikes, particularly for large-cap contractors. Meanwhile, the increase in minimum wage from RM1,700 to RM2,000 (from July 27 onwards) is not viewed as a material risk for mid-large cap contractors under our coverage, and remains manageable. Notably, large-cap contractors such as Gamuda, Suncon and IJM have already been paying most of their construction workers above RM1,700. Furthermore, the sector’s median salary is above RM3,000. Hence, the impact on larger construction companies is likely to be manageable.