Intense competition seen in construction sector


Quarterly update: Nomura says Malaysia’s construction sector experienced a very high degree of fragmentation.

PETALING JAYA: A disproportionate number of recently awarded packages from the DASH and SUKE highways went to unlisted contractors, posing a new threat to Malaysia-listed construction companies.

In its inaugural quarterly update on the Malaysian construction sector, Nomura Research said that such development raises the possibility of intense competition among existing players.

Malaysia’s construction sector experienced a very high degree of fragmentation, where even the sector proxies such as IJM Bhd and Gamuda Bhd accounted for 2% of total industry revenue.

Based on Nomura’s proprietary indices for pure-play (which derive a bulk of earnings from construction) and diversified contractors (such as IJM and Gamuda), pure-play contractors have outperformed the big-cap diversified contractors, which grew by 58% and 5% respectively.

Commenting on the plausible reasons behind the outperformance of pure-play contractors, Nomura Research said that it can be due to property cooling measures that have caused downgrades in the property segment for the diversified big-caps.

“We also believe that it may be due to the fact that valuations for the diversified big caps are now fairly expensive, caused predominantly by constant earnings downgrades from their property earnings division.

“We think pure-play contractors are likely to continue outperforming big caps as long as they deliver earnings growth over the next 12 months,” said Nomura Research in its report.

In terms of valuation, the diversified contractors are trading at 18x trailing price-earnings ratio. The pure-play contractors valuation is relatively lower at about 14x trailing price-earnings ratio.

The research house also noted that the second-half of the year saw a record low number of new-project awards, plunging by 40% on a year-on-year basis.

The bulk of the slowdown came from the property sector, notably the residential and commercial segments.

Residential property project contracts have been reducing for almost two years, after peaking in the first quarter of last year. The fall was due to weak property sales in Malaysia after further cooling measures were introduced by the Government in 2013.

In order to escape from the volatility in the construction earnings, many big-cap construction companies in Malaysia have ventured into other segments to diversify their businesses. To recap, the sector’s stocks’ margins have been on a steady downtrend since 2003.

The research house had reiterated a “neutral” stance on the construction sector because construction stocks’ margins might continue to erode, largely offsetting the gains from their record order books.

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 18
Cxense type: free
User access status: 3

Business , Construction

   

Next In Business News

CPO futures trading to remain range bound next week
Advisory panel unanimously recommends FDA authorize Johnson & Johnson COVID-19 vaccine
GameStop rally fizzles; shares still register 151% weekly gain
NYSE begins move to delist Chinese state oil producer CNOOC
Oil price drops on US$ strength and OPEC+ supply expectations
GLOBAL MARKETS-Globals stock slide on inflation fears
AMMB says it has enough capital to absorb 1MDB global settlement�
A five-year high for FGV Holdings
AMMB to pay RM2.83bil to the government
IHH to take proactive measures

Stories You'll Enjoy


Vouchers