CIMB Research sees muted Q4FY18 earnings for construction firms

KUALA LUMPUR: CIMB Equities Research expects a muted Q4 FY18 earnings season for contractors due to the slowdown in billings, timing of contract renegotiations and slow job wins.

“We believe LRT 3 contractors would be most impacted though a reprieve could come in the form of the delayed RM800mil to RM1bil payment of claims,” it said on Tuesday.

Amidst a subdued sector outlook, it favours diversified contractors with robust overseas exposure like Muhibbah Engineering and retained Underweight on the sector.

CIMB Research pointed out the upcoming FY18 full-year reporting season was expected to be muted for contractors as the Q4 FY18 construction earnings were likely to be weak on-quarter, reflecting the impact of the downturn in contracts, especially in 2H18. 

“From our channel checks, we gathered that contractors in general have been facing slow payments/billings for selected contracts, particularly those with relatively high exposure to government contracts. 

“For the two major rail contracts (LRT 3 and MRT 2), contractors under our coverage had 7%-90% exposure to their outstanding order books as at end-September 2018, by our estimates,” it said.

The research house said for LRT 3 contractors particularly, the prolonged renegotiation of all work package contracts (WPC), conversion from the project delivery partner (PDP) scope to turnkey contract, and the delayed payments for works completed would likely dent their Q4 results in the form of lower revenue recognition and construction profits.

However, this would likely be mitigated by other private sector/non-rail jobs, where pretax margins are relatively higher (6%-8%), and the lower risk of provisions in view of the incoming RM800mil to RM1bil claims payment from Prasarana.

“We understand that the earnings impact for MRT 2 (SSP) line contractors is likely to be less negative, as the transition from PDP to turnkey model was over a shorter period of time and the fact that the cost rationalisation came after the project was more than 30% completed. 

“We expect the cost rationalisation impact, which saw the total contract value slashed by 38%, to impact Gamuda the most (being the turnkey and underground contractor). Outstanding revised value of MRT 2 makes up 90% of Gamuda’s outstanding order book, prior to the conversion to the turnkey model.

“Year-to-date, the overall sector outlook remains subdued. A negative earnings surprise could potentially weigh on share prices, particularly given the uncertainties around the East Coast Rail Line (ECRL) and Klang Valley Double Tracking (KVDT) re-tenders. 

“Ahead of the reporting season, we favour Muhibbah Engineering for its cheap valuations, robust overseas earnings and airport concessions,” it said.


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