Malaysia is one of Asia's biggest employers of foreign labour. But recently, cases of deaths, abuse and forced labour have come to light. What is going on? Who is protecting these migrant workers?
BY EUGENE MAHALINGAM
NOT surprisingly, share prices of most construction stocks tumbled this week following news of the Government increasing the levy for foreign workers.
Yesterday, shares of Gamuda Bhd closed down 12 sen to RM4.56, WCT Holdings Bhd was flat at RM1.64 while Lafarge Malaysia Bhd was down 20 sen to RM9.
CIMB Research in a report earlier this week said that the new RM2,500 annual levy implied a monthly cost of RM208, on top of the estimated industry average salary of RM1,300-RM1,900 per month of a foreign worker.
This would effectively work out to an 11% to 25% rise in the foreign labour cost, which is deemed manageable. Sector-wide, the labour cost roughly forms 20%-25% of the total cost.
“As such, we estimate between a 2% and 4% earnings per share impact on contractors under our coverage. The actual impact on the bottom line depends on several scenarios, for example, the terms for the contracts that are in progress or outstanding could be renegotiated through additional claims, with the possibility of settlement during the final certification of works.”
According to CIMB, checks with contractors seem to suggest that there would be an element of cost pass-through, but it would depend on several factors.
“In the case of new tenders, new regulated cost structures such as a higher levy for foreign workers will be usually priced-in.”
The Master Builders Association (MBAM), in reaction to the levy hike, had a press conference earlier this week and said there were about 130 sub-sectors, including manufacturing and services, which would pass the cost back to the industry.
“Ultimately, we will pass the additional costs to the end users or purchasers,” cautioned MBAM deputy president Foo Chek Lee, adding that the prices of houses could also see an increase.
MBAM said the construction industry was looking at a 10% increase in labour cost and a 2% increase in overall cost.
CIMB Research, meanwhile, says contractors who have jobs that are largely at the tail-end appear to be the least impacted, while contractors with a relatively higher number of orders who have crossed the 20% to 30% 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.”
The research house also notes that Muhibbah Engineering could mitigate the higher levy with dollar-priced jobs in Petroliam Nasional Bhd’s Refinery and Petrochemicals Integrated Development project in Pengerang, Johor.
“We expect the overall impact on Muhibbah Engineering to be immaterial,” CIMB says.
The research house also says that IJM Corp’s RM7bil outstanding order book is still the highest in the sector, but pointed out that a sizeable proportion still comes from the private sector.
“This could imply that it has better chances of passing through the higher cost.”
Insulated rubber glove sector
According to CIMB Research, the foreign worker levy rate for the manufacturing sector rose by 100% to RM2,500 per worker.
Although the majority of the local glove companies employ a significant number of foreign workers for their production lines, the research house believes the impact will be minimal, as it expects the cost hike to be shared by the foreign workers.
“We estimate this could reduce the 2016 sector profit by about 1% to 2%.”
Affin Hwang Capital says while the hike is negative, it does not expect a substantial impact on the rubber glove players, as labour costs only constitute 9% to 13% of the total operating cost.
“We estimate that the levy is approximately 3% of the total labour cost, and hence, the proposed 100% increase in levy will impact earnings by only 1% to 3%. We think that the impact is manageable, and coupled with ongoing automation programmes being implemented in stages, we believe that this news will be short-term negative at best.
“While we understand that glove makers maintain a cost pass-through mechanism, there will be a time lag of between one and three months before any cost increase can be completely passed on to the customers.”
Affin Hwang says it expects rubber glove players to fully absorb the hike, given its minimal impact on the earnings.
MIDF Research, meanwhile, says it is still unclear which party will be responsible for the additional increase in the foreign worker levy.
“Unlike the plantation sector where the employers are paying for the levy, the industry-wide practice for the glove players currently is that the foreign workers are paying for the current levy of RM1,250 via monthly salary deductions of RM100 a month.
“With this new increase to RM2,500, each employee is now expected to have RM200 deducted from their monthly salary should the employees continue to bear the levy.”
Pending further confirmation from the Government and assuming that the employees will continue to bear the new increase in levy, MIDF Research believes the hike will offset the RM100 increase in salary per month from the newly implemented minimum wage policy.
The research house also says it is expecting no impact on volume as the players gradually ramp up production capacity to meet increasing demand.
“Furthermore, some of the players have opted to reduce the number of foreign workers to mitigate the impact of the increase. Top Glove Corp Bhd, for example, announced on Tuesday that it is targeting to reduce its foreign worker dependency by 5% or 300 workers.
“Previously, Top Glove had reduced about 1,000 foreign workers in the past two to three years with the increase in automation of its manufacturing processes.”
Source: The Star Online
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