New levy for foreign workers to raise costs 11-25%

 

Sector wide, labour cost roughly forms 20-25 per cent of total cost, it said on Tuesday. 

 

“As such, we estimate a 2 per cent-4 per cent EPS impact for contractors under our coverage.  Actual impact on bottomline depends on several scenarios.

 

“Guidance from contractors is that there should be an element of cost pass through, but it would depend on several factors. 

 

“For contracts that are in progress/outstanding, terms could be renegotiated through additional claims with the possibility of settlement during the final certification of works,” it said. 

 

The government announced that with effect from Feb 1, employers of foreign workers in these sectors would see the levy double from 1,500  ringgit a year to 2,500 ringgit a year.

 

CIMB Research said this doubling of the levy is a negative surprise for most contractors.

 

 The new 2,500 ringgit annual levy implies a monthly cost of 208 ringgit, on top of the estimated industry average salary of 1,300-1,900 ringgit a month of a foreign worker. 

 

This effectively works out to an 11-25 per cent rise in foreign labour cost, which is deemed manageable. 

 

“Sector wide, labour cost roughly forms 20-25 per cent of total cost. As such, we estimate a 2-4 per cent EPS impact for contractors under our coverage,” it added.

 

CIMB Research said for contracts that are still in tender, pricing is typically adjusted if the bid is ongoing. In case of new tenders, new regulated cost structures such as higher levy for foreign workers will be usually priced-in.  All contractors are losers but some have better buffers  

 

Contractors that have jobs that are largely at the tail-end appear to be the least impacted, while contractors with relatively higher number of orders that have crossed 20-30 per cent milestones are likely to see some margin squeeze before additional claims are recognised. 

 

“Under our coverage, Gamuda could be spared in 2016 as the tender for MRT 2 is still ongoing and its single-project order book for MRT 1 is at the tail-end. Muhibbah could mitigate the higher levy with US$ priced jobs in RAPID.

 

“The new levy structure is bad news for the sector but should be manageable over time. On the brighter side, following the announcement of the budget revision last week, most projects that are under the original list of Budget 2016 are largely intact. Investors should focus on a potential major recovery in sector newsflow from 2Q16. We believe any share price weakness from this news would be a buying opportunity. Gamuda and Muhibbah Engineering remain our top picks,” it said.