Building Goes Abroad


Economic News

22 Jul 2010
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In a move that would create a large infrastructure and construction company with a significant presence internationally, Malaysian construction firm IJM Corporation this week announced a takeover bid for of Road Builder Holdings (RBH). Many observers see the bid as a response to a stagnant domestic market and a means to pursue increasing opportunities overseas.

IJM has proposed to acquire all the assets and liabilities of RBH for RM1.56bn (US$424m) after the infrastructure company's single largest shareholder, former director Chua Hock Chin, divested himself of his shares.

The construction industry has been sluggish over the last two years, as both large and small firms have scrambled for contracts. The building boom that spanned the last decade has slowed, leaving a surfeit of companies and less work to go around.

Following the slowdown, mergers and acquisitions have become more appealing to companies eager to remain competitive. The current low valuation of many listed infrastructure and construction firms make them ripe for takeovers. Smaller players are looking for ways to stay afloat, while the larger ones are looking to buttress themselves technically and financially to move into specialised growth areas or niche markets.

It is difficult to determine what the future will hold for the domestic construction industry. The projects announced in conjunction with the Ninth Malaysian Plan (9MP) were a pump-priming exercise that many hoped would keep the local players busy. Some insiders believe that growth in the sector should begin again in early 2007, as more government projects will be tendered to the large and medium sized construction companies.

However, it is difficult to tell if these projects - mostly infrastructure projects such as schools, roads and water facilities - will be sustainable beyond the five-year span of the 9MP.

But according to some observers, the fact that many are counting on the 9MP as the last great hope for the industry points to the overdependence of construction firms on government tenders. Many have questioned the sustainability of such a situation. The CEO of a local medium-sized developer told OBG that most of the country's infrastructure needs will be met by the end of the decade, "Probably by 2010 - especially in the Klang Valley, Selangor, Penang, and Johor - we will have enough of everything."

Another head of a local construction firm agreed, "Probably this will be one of the last few large government infrastructure building plans. After that they will stop building and start looking at maintenance."

The recent slow down in domestic work has already led many Malaysian contractors to go abroad in search of work, where many have met with success.

AK Nathan, the group managing director of Eversendai Corporation, a Malaysian steel engineering and construction firm, operating abroad since 1988, told OBG the size and sophistication of many Malaysian builders has led them to go abroad. "Malaysia had a boom time and many contractors set up and established their own firms. Some of them became pretty big and have to survive - they can't just stay put in Malaysia waiting for projects. They have to go out for it," he said.

He cited India as one area where Malaysian companies have ventured significantly, particularly in pursuit of infrastructure projects.

Meanwhile, other Malaysian companies have entered the Middle Eastern market and some have won some lucrative contracts. In July, Malaysia's largest infrastructure company, Gamuda,beat nine international firms to clinch a RM640m (US$174m) contract to build a bridge in Bahrain. The deal followed on the heels of a 2005 deal with its partner WCT Engineering for two Qatar contracts - a highway and the airport - worth some RM2.7bn (US$734m) collectively.

Ranhill, the country's largest engineering firm has an order book of just above RM6bn (US$1.6bn), of which slightly more than 50% of the contracts are from abroad - including infrastructure projects in Libya, Turkey and Pakistan.

Such examples are becoming more common, and IJM itself is no stranger to winning foreign contracts. It currently has six major projects on its order books in India and Dubai.

The 9MP projects for all the speculation about sustainability will tide the sector over. Nathan believes it is only temporary. "Every country has a cycle and Malaysia is at a low ebb. Malaysia is in a phase where it should settle down, reorganise and in about two years, it should pick up again."

Sia Teong Heng, managing director of SBC Corporation, a local contractor that has begun work in Thailand, is equally sanguine. "The Malaysian industry is pretty flexible in terms of the amount of work. I think a lot of the calls of oversupply are a little mistaken - I think we've just had it too good for too long."

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