PETALING JAYA: While it has maintained its positive stance on the construction sector, MIDF Research cautioned that the current “risk-taking mode” sweeping the market should be tracked closely.
The research house said the sector received a constant loan disbursement rate in February 2017, amounting to RM5.19bil, which was a 9.9% increase year-on-year and 30.4% decrease month-on-month.
It expects the consequent monthly credit liquidity for the construction sector to remain between RM4.5bil and RM5.1bil until October 2017.
It noted that the average monthly credit liquidity for the construction sector between January 2006 and February 2017 was RM4.11bil.
“In our view, the sharp increase in construction loans disbursed in January amounting to RM7.3bil will not be repeated to prevent excess liquidity,” it said.
Considering the recent announcements of major construction projects, it said the sector’s expansion could be stunted if liquidity for the sector dried, as had occurred in 2010 and 2012 when the average loans disbursed amounted to only RM4.3bil and RM4.5bil, respectively.
It also noted that valuation had gathered steam with a steady construction sector’s price-to-earnings ratio (PER) of 23.9 times as at end-February 2017, compared to 15.4 times in February 2016.
“We believe that the street has taken notice of the dizzying valuation and therefore stagnated the advancement of the sectoral PER by taking profit,” it said.
It added that minimal month-on-month changes in the sectoral PER since January 2017 signified the beginning of valuation normalising below its median of 22.8 times PER.
However, MIDF Research noted that despite the price-to-book ratio (P/BR) and PER, earnings yield played an important role.
“Altogether, we maintain our positive stance on the construction sector with a stronger whiff of caution; we will only reassess our view on the sector if all our top picks hit the target price and the spread between the sector’s earnings turns negative against the yield of 5-year Malaysian Government Securities.