The construction sector is expected to benefit from the government’s RM83 billion development expenditure allocation under Budget 2027, alongside RM11 billion in public-private partnership (PPP) investments, although rising labour costs could weigh on contractors’ margins, according to Hong Leong Investment Bank (HLIB) Research.
The research house maintained its OVERWEIGHT rating on the construction sector, supported by continued infrastructure spending, flood mitigation projects, water infrastructure upgrades and road developments in Sabah and Sarawak.
HLIB noted that the RM83 billion development allocation for 2027 represents a modest increase from the RM81 billion estimated for 2026.
While the budget did not introduce major new infrastructure projects, it said the RM11 billion earmarked for PPP investments could benefit large-cap contractors with strong balance sheets and the financial capacity to undertake sizeable developments.
“Overall, we view Budget 2027 as decent, supported by the continued rollout of smaller-scale flood mitigation works, road infrastructure projects in East Malaysia and the proposed elevated e-ART system in Johor,” HLIB said in its sector review.
Flood Mitigation, Water Infrastructure To Generate Construction Opportunities
Among the key initiatives highlighted under Budget 2027 is an allocation of RM100 million for retention ponds and river maintenance works aimed at reducing flood risks in the Klang Valley.
Other planned flood mitigation projects include the River Rehabilitation Project and Sungai Rambai Flood Mitigation Project in Melaka, Sungai Golok Integrated River Basin Development Phase 2 and Lebir Dam project in Kelantan, Sungai Kemaman Integrated River Basin Development in Terengganu, and Kuching City Flood Mitigation Project in Sarawak.
Meanwhile, RM2.5 billion has been earmarked for the National Non-Revenue Water (NRW) Programme, involving the replacement of approximately 1,900 kilometres of ageing water pipelines nationwide.
The government also plans to construct the Machang Water Treatment Plant in Kelantan and improve clean water supply infrastructure in rural areas.
HLIB said the pipeline replacement programme could create business opportunities for local pipe manufacturers, including Engtex Group Bhd, which is not rated by the research house.
Infrastructure development in East Malaysia remains a key priority, with RM3.3 billion allocated for road projects in Sabah and Sarawak.
These include the Trans Borneo Highway, for which the Miri section has already been awarded, while contracts for the Limbang and Lawas sections are expected to be awarded by the end of 2026.
The Sarawak–Sabah Link Road 1 and Pan Borneo Highway Sabah Phase 1B are also targeted for completion by the end of 2027.
In Negeri Sembilan, key infrastructure projects include the construction of the KLIA–Bandar Enstek Road, upgrading of the Pajam–Nilai–Salak Road and implementation of the Klang Valley Double Track Phase 2 Project.
Johor Bahru is also set to benefit from the proposed elevated autonomous rapid transit (e-ART) system, aimed at easing traffic congestion following the scheduled opening of the Johor Bahru–Singapore Rapid Transit System (RTS) Link in 2027.
HLIB said these projects would provide continued construction opportunities despite the absence of major new infrastructure announcements.
Rail Upgrades, ECRL Extension To Support Infrastructure Activity
Budget 2027 also outlined further investments in Malaysia’s rail network, including the extension of the East Coast Rail Link (ECRL) from Kota Bharu to Rantau Panjang near the Malaysia–Thailand border.
Prasarana Malaysia Bhd is expected to invest more than RM3.4 billion to upgrade its rail services, while the government plans to procure 42 new train sets for Electric Train Service (ETS) and KTM Komuter operations.
Separately, RM1.3 billion has been allocated to upgrade 682 dilapidated schools, particularly in Sabah and Sarawak.
These smaller-scale public infrastructure projects are expected to sustain construction activity and provide contract opportunities across various segments of the industry.
Minimum Wage Increase Could Pressure Contractors’ Margins
Despite the positive infrastructure outlook, HLIB cautioned that the planned increase in the minimum wage from RM1,700 to RM2,000 per month, effective June 2027, would generally be negative for the construction sector.
The higher wage requirement could increase operating costs for labour-intensive contractors, potentially affecting project margins.
However, the research house welcomed the government’s decision to reinstate the variation of price (VOP) clause for public infrastructure projects.
The provision is intended to help contractors manage fluctuations in diesel and bitumen costs, providing some protection against rising construction expenses.
HLIB believes the reinstatement could partially offset cost pressures arising from higher labour and material expenses.
Gamuda, Inta Remain HLIB’s Top Construction Picks
HLIB maintained its preference for large-cap construction companies, particularly those with strong exposure to Malaysia’s expanding data centre industry.
The research house said the ongoing data centre investment boom remains a key earnings catalyst for major construction players, alongside continued public infrastructure spending.
Its preferred stocks are:
Company Recommendation Target price Gamuda Bhd BUY RM5.75 Inta Bina Group Bhd BUY RM0.76
HLIB expects contractors with strong financial positions and established project execution capabilities to be better placed to capitalise on the government’s PPP initiatives and private-sector construction demand.
Overall, the research house believes Budget 2027 provides a supportive environment for the construction industry, with sustained infrastructure allocations, water projects and East Malaysian road developments helping maintain industry activity.
However, contractors’ ability to manage rising labour costs, execute projects efficiently and secure new contracts will remain important factors influencing profitability.
HLIB reiterated its OVERWEIGHT stance, with data centre construction continuing to underpin its positive outlook for the sector’s major players.
