Slow recovery expected for construction sector


  • Analyst Reports
  • Monday, 20 Apr 2020

KUALA LUMPUR: There is expected to be a slow recovery for the Malaysian construction sector post-movement control order although the companies are in a better financial position to weather the cyclical downturn as compared to in previous crises.

According to Affin Hwang Capital research, which has an underweight call on the sector, the MCO will impact construction and property development progress billings, traffic volume for toll highway concessions and property sales as shows galleries are closed.

Meanwhile, strict work and travel restrictions are likely to remain after the MCO is lifted.

"We have assumed aggregate revenue for our universe of construction companies to contract 4% yoy in 2020E and 5% yoy in 2021E (-10% yoy in 2019).

"As a result, we expect sector core net profit to contract 9% yoy in 2020E and 1% yoy in 2021E (-25% in 2019)," it said.

However, the sector's net gearing is below the historical average while interest coverage and quick ratios are at comfortable levels.

"Based on Bloomberg data, we estimate aggregate construction sector net gearing was 0.59x in 2019, higher than 0.52x in 2008 (GFC) but lower than 1.26x in 1997 (AFC) levels.

"Sector interest cover was a comfortable 4.2x in 2019, the same level as 2008 but higher than 2.8x in 1997. Quick ratio was at a comfortable 1.1x in 2019, higher than 1.0x in 2008 and 0.7x in 1997," it said.

Certain projects including the MRT2, LRT3, ECRL and Pan Borneo Highway will likely be allowed to continue although there will also likely be limits on the number of workers and working hours, which will hamper work progress.

Affin Hwang noted the contractors involved include Gabungan AQRS, Gamuda, HSS Engineers, IJM Corp, MMC Corp, MRCB, Sunway Construction and WCT
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