Affin Hwang Capital Overweight on construction sector

Moving forward, the group anticipates a good performance this year from ongoing construction projects and steady earnings from the water and expressway concessions division.

KUALA LUMPUR: Affin HWang Capital Research is Overweight on the construction sector with a positive outlook on contract awards, which should accelerate in H2 2017. Top Buys include Gamuda, WCT and HSS.

In a research note released on Monday, Affin Hwang Research reports that Q217 results for the sector were generally below expectations despite strong earnings growth in the construction businesses owing to weaker earnings from the companies' non-construction businesses.

"The construction sector’s aggregate core EPS grew 23% y-o-y in 2Q17, the fourth consecutive quarter of positive growth and accelerating from 6% y-o-y in 1Q17. This was mainly driven by higher construction earnings as progress billings accelerated on new construction contracts secured last year. 

"The property divisions for the companies under our coverage, such
as Gamuda, IJM Corp, WCT, MRCB and AQRS, saw weaker earnings. Suncon saw weaker earnings from its precast concrete division due to a lower sales volume as construction progress for a main contractor slowed," it said.

The research firm also expects contract awards to accelerate in H2 2017 as major packages in the Light Rail Transit Line 3 project are rolled out. RM3.4bil worth of contracts have been awarded for the project to-date and indications are that the total contract value could exceed the initial estimate of RM10bil.

"WCT and TRC Synergy won LRT3 packages of RM1.03bil and RM0.76bil respectively. We believe the remaining packages will be awarded by early October. Other contractors vying for the remaining packages should include Gamuda, IJM Corp, Suncon, AQRS, Mudajaya, Fajarbaru, Gadang and unlisted Syarikat Muhibbah (AQRS’ Bumiputera partner)."

There will be more upsides for the construction sector as the government is expected to increase the allocation for development expenditure in the upcoming Budget 2018. 

"We forecast the development expenditure budget to increase to RM50bil in 2018 compared to RM46bil in 2017 to meet the RM260bil target spending in 2016-2020 under the 11th Malaysia Plan (11MP). This augurs well for the construction sector with more public sector projects," said RHB Investment Research.

"We are Overweight the construction sector as news flow on contract awards should sustain sector outperformance in 2H17. The award of subcontract works for the RM55bn East Coast Rail Link (ECRL) project is expected to start in 4Q17. We see more value in small/mid-cap names like WCT and HSS. In large caps, we prefer Gamuda over IJM. Risks: project delays and rising construction costs."