KUCHING: The nation’s construction sector’s outlook will largely depend on the fate of Malaysia’s direction and policy after the general elections (GE), according to industry sources.
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| ATTRACTIVE BARGAINS: The construction sector will be very attractive for bargain hunting if any ‘knee-jerk reaction’ is present and overdone post-GE13 |
They opined that the sector would be re-rated if the outcome of the GE13 favoured contractors and could be upgraded once uncertainties due to GE were cleared. The construction sector would be very attractive for bargain hunting should any ‘knee-jerk reaction’ be present and overdone post-GE13.
Analysts concurred that investors should hold positions and focus on the fundamentals after GE13. That said, they pointed out that construction stocks’ value should emerge post-GE13.
This was premised on visible earnings attributed by existing strong order books that were mostly replenished last year; a bright replenishment order book prospect given that some of the ‘big ticket’ Economic Transformation Programmes (ETP) projects have yet to be awarded.
These included the Gemas JB Double Tracking, HSR, MRT2 and MRT3, ECERR, Langat 2, SCORE-related projects (road, water, power plants), buildings jobs (Media City, Harrods, Menara Warisan) and the Penang Traffic Alleviation project.
Kenanga Investment Bank Bhd’s research arm, Kenanga Research while maintaining a neutral recommendation on the construction sector for the second quarter of 2013 (2Q13), expected investors to continue to impute in the election risk premium to construction stocks due to the uncertainties of the upcoming GE, widely speculated to be held some time before early June 2013.
Despite fears over the election outcome, the construction sector fared well in 1Q13, with RM9.2 billion worth of contracts (including West Coast Expressway) having been awarded to listed contractors in the quarter, 17 per cent higher than that in 1Q12.
It noted that positive news from transport-related projects, including those such as the KL-Singapore High-Speed Rail (G2G approval in principle), the double-tracking railway and the mass rapid transit (MRT) project had kept the sentiment flowing in the sector in 1Q13.
It retereited its preference for fundamentally strong contractors that had delivery track records, healthy balance sheets and sufficient capacities to counter this mundane period such as Gamuda Bhd.
Besides its strong order book of RM4.2 billion and encouraging domestic property sales, Gamuda’s order book replenishment prospect was rather bright as it was one of the biggest beneficiaries of Malaysia’s rail-infrastructure story, it rationalised.
Kenanga Research observed that 4QCY12 saw a mixed bag of results with financial year 2012 construction earnings under its coverage comind in largely within its expectations. The ones that missed its estimates were WCT Bhd, Bina Puri Holdings Bhd, Fajarbaru Builder group Bhd and Naim Holdings Bhd.
This was predominantly due to provisions made for previous contracts and also due to their slower than expected recognition of ongoing projects, which further reduced their contract margins, it pointed out.
Moving forward, the research form expected earnings for the contractors to be better in 1H13 on both quarter on quarter and year on year basis underpinned by the likely pick-up in MRT and Light Rail Transit (LRT) works.
As to expectations for 2QCY13, Kenanga Research noted that contract award flows would be muted during this ‘sensitive period’. It pointed out that the flows of contract had started to slow down in 1Q13 itself.
“The total RM9.2 billion worth of contract value awarded so far in 1Q13 to listed contractors was actually boosted up by the RM6 billion WCE. Excluding the WCE, the value totalled only RM3.2 billion.
“Nevertheless, we reckon the earnings for mid-cap construction stocks will gain momentum after the progress of ongoing projects like the LRT extension, power plants, Besraya Extension and the MRT project are speeded up after the election,” the research analysts stated.
The KL Construction Index’s price earnings ration (PER) is currently trading at 13.6 times or at a 24 per cent discount to its three year historical average PER of 17.9 times despite the sector’s still solid fundamentals.
Kenanga Research team’s picks for larger cap players included fundamentally strong contractors such as Gamuda Bhd as it would likely be able to withstand the uncertainties of the election outcome via its ability to leverage on its ample capacity and strong balance sheet position.
In addition, the analysts saw Gamuda benefiting from the potential rebound in appetite for the construction sector post-election. Some of the contracts which were in the pipeline and that could benefit Gamuda that they listed included the RM8 billion Gemas-JB EDTP via a JV with a Chinese contractor, a tunnelling of MRT Line 2.
Others included a high-speed rail (HSR) project and the RM3.1 billion Langat 2 project which could all easily double Gamuda’s existing RM4.2 billion outstanding order book.
Whilst for the smaller-cap below RM1 billion players it opt edfor Muhibbah Engineering (M) Bhd (Muhibbah) as the research firm believed that it would stand a chance to be in the running for the civil works in RAPID, Penggerang given its strong track record and niche in the oil and gas construction industry. To recap, Petronas was Muhibbah’s previous client for its regasfication plant project in Melaka.
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