PETALING JAYA: Earnings of companies in the construction sector are expected to falter this year, but a recovery is seen in 2021 on the roll-out of some deferred infrastructure projects.
While the construction sector has been allowed to resume work following the easing of the movement control order (MCO), which was imposed on March 18, things have not gone back to the way they were before the Covd-19 outbreak.
Kenanga Investment Bank head of research Koh Huat Soon said checks with companies reveal that job flows have been slow despite the easing of the MCO. The downtime in productivity is expected to put a dent on the bottom lines of construction players for the April-June reporting period.
However, some big construction companies with Dec 31 financial year-end have yet to announce their 1Q20 earnings. They are slated to do so sometime this month following a one-month extension given to companies in lieu of the Covid-19 pandemic.
Koh expects these upcoming 1Q20 earnings from construction players “to disappoint the market”.
“We also see an equally depressing, if not worse 2Q20, where the brunt of subdued construction activity for the month of April, May and part of June, would be felt, ” he told StarBiz.
Going by this, Kenanga Research has aggregately reduced FY20 estimated earnings by 20% to cater for the MCO impact. However, it lifts FY21 estimated earnings by 4% on deferred works.
Nevertheless, the research house sees an opportunity to accumulate certain construction names as it believes that the government will gradually pivot its focus onto economic recovery measures for the mid- to long-term horizon.
“Drawing experience from historical lessons, we are convinced that construction will be a key lever for the government to kick-start the recovery and it is a matter of time before the sector will undergo a blanket re-rating, ” Koh said in his report where he maintains an “overweight” on the sector.
As the economy gradually opens up, he reckons that construction would be grabbing more headlines from the likelihood of projects that could be rolled out to pump-prime the economy.
“As markets are forward looking, all eyes are on goodies (from construction) in Budget 2021 and the 12th Malaysia Plan, ” he said.
Although the KL Construction Index has gained about 47% from year-to-date lows, Kenanga Research thinks there might be more upside as further catalytic news flow emerges from Budget 2021 and beyond this, on the timeline for the Kuala Lumpur-Singapore High Speed Rail (HSR) and the Klang Valley MRT Line 3 (MRT3) projects.
Meanwhile, Affin Hwang Capital said there could be some measures to stimulate the construction sector, besides property under the short-term economic recovery plan that the government is planning to unveil soon.
Based on its channel checks it expects measures to promote public-private partnership for government facilities and infrastructure development such as the building of hospitals, water supply and renewable power-generation plants, which could potentially benefit some listed construction stocks.
As for MRT3 and HSR projects, while news of their revival have spurred a rebound in construction stock prices over the past few months, Affin Hwang expects these projects to be delayed to 2021 due to the government’s financial constraint to implement the projects amidst Covid-19.
Hence, it does not expect the two projects to be included in the short-term economy recovery plan, but rather more likely in the 12th Malaysia Plan that would be announced in early-2021.
The research house said it remains cautious on the construction sector given that the earnings forecast and order book replenishment risks as new project roll-out is expected to remain slow.
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