Steady outlook seen for Malaysia's construction sector

  • Business
  • Thursday, 09 Jun 2016

More contractis: Total value of contracts awarded in May jumped to RM5.6bil from RM906mil in April due to contracts awarded for the KVMRT Line 2.

PETALING JAYA: KAF-Seagroatt & Campbell Securities (KAFSC) expects a steady outlook for the local construction sector, driven by heightened rollout of domestic infrastructure projects.

In a report yesterday, it said total value of contracts awarded last month jumped significantly to RM5.6bil from RM906mil in April, due to the sizeable contract awards for the Klang Valley Mass Rapid Transit (KVMRT) Line 2.

“Among the noticeable awarded contracts during the month was the RM2.1bil KVMRT viaduct packages awarded to IJM Corp Bhd and Malaysian Resources Corp Bhd as well as the RM2.1bil KVMRT systems work packages awarded to HAP and BGR Consortium.

“The total value of contracts awarded for the first five months was RM37.1bil, 451% higher than RM6.7bil for the same period last year.”

The research house also said that steel production levels were still subdued and that material prices have been dropping.

“China’s crude steel production was up slightly by 1% year-on-year in April but still down 2% year-to-date. Its exports of steel products were higher by 6% year-on-year in April and 8% year-to-date.

“Domestically, steel product imports grew 10% year-on-year in April but down by 7% over the first four months.”

KAFSC said local cement and steel production was also down 6% and 18% year-to-date respectively up to March as demand had yet to soar from the rollout of key projects.

“Commodity prices have corrected noticeably from their recent peaks – iron ore prices have retracted by 24% but still up 15% year-to-date, while coking coal and scrap prices have fallen by 12% to 23%, nonetheless still higher by 11% and 30% year-to-date respectively.

“The local steel bar benchmark prices have also settled at around RM2,200 to RM2,400 per tonne levels since early May following a strong rally. The benchmark steam coal prices have also appreciated by 19% year-to-date.”

In summary, KAFSC said it is maintaining an overweight call on the local construction sector.

“Following the recent sell-off, we see value emerging at WCT Holdings Bhd for which we have a “Buy” and RM2.10 target price.

“We continue to see Muhibbah Engineering Bhd as a distressed play given that its market cap can be adequately justified by the value of its concessions and cranes business, with no value ascribed to its construction business.”

Meanwhile, the research house said it is maintaining a “Buy” on Ann Joo Resources Bhd, as valuation still appears distressed at 0.5 times its 2016 price-to-book value despite the sharp run-up in the share price.

“Lafarge Malaysia Bhd remains a “Sell” as valuation at 24.9 times 2016 price-to-earnings appears excessive while dividend yields may fall in line with deteriorating earnings.”

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