The construction sector is expected to manage the impact of Malaysia's latest labour reforms, with RHB Investment Bank Bhd (RHB Research) maintaining an OVERWEIGHT rating on the industry.

RHB Research's assessment continues to favour top companies like Gamuda Bhd, Sunway Construction Bhd (SunCon) and Kerjaya Prospek Group Bhd. Despite changes including a higher minimum wage and new regulations on foreign worker contributions to the Employees Provident Fund (EPF), the earnings impact for major contractors is projected to be minimal, around 1.7% to 1.8% for FY25.

The new minimum wage, which will rise from RM1,500 to RM1,700 in February 2025, is unlikely to cause major disruptions. Many contractors, including Gamuda, SunCon and IJM Corp Bhd, already pay their workers above this threshold. For general construction workers, daily wages range from RM80 to RM100, meaning most already surpass the new wage floor. However, there is a potential knock-on effect, where workers earning slightly above the minimum wage could request pay raises to maintain wage gaps, which may slightly pressure contractors.

Another significant change involves the introduction of the multi-tiered foreign worker levy, set to begin early next year. While details were not fully outlined in Budget 2025, hypothetical earnings projections based on past proposals suggest that the impact on contractors like SunCon would be limited, reducing earnings by less than 1%. This suggests that the sector can absorb these costs without significant operational disruption.

In addition, foreign workers will now be required to contribute to the EPF, with the government phasing in this policy gradually. Though this may deter some foreign workers from seeking employment in Malaysia, the estimated impact on contractors remains manageable. If the full 11% EPF contribution is enforced, foreign workers will take home RM1,513 from the revised minimum wage of RM1,700. Contractors will also need to contribute 12% to 13% for wages under RM5,000. While this adds to labour costs, it could be offset by wage adjustments to ensure workers meet the minimum take-home pay.

Despite these challenges, the labour reforms may accelerate the adoption of industrialised building systems (IBS) in the construction industry. The government is pushing for increased use of IBS, which had an 84% adoption rate for government projects and 60% for private sector projects in 2021. This trend could help contractors reduce their reliance on manual labour and manage labour-related costs more efficiently.

Overall, while the sector faces some risks such as delays in project rollouts, rising material costs and difficulties in hiring foreign workers, the construction industry remains well-positioned for growth. Major infrastructure projects outlined in Budget 2025, including highways, industrial hubs and flood mitigation works, are expected to provide significant opportunities.