UOB Kay Hian Research sees contractors’ earnings picking up


  • Construction
  • Wednesday, 22 Jul 2020

The Penang Transport Master Plan: Penang government website

KUALA LUMPUR: UOB Kay Hian Malaysia Research expects contractors’ earnings to pick up gradually from mid-3Q20 onwards from the low base in 1H20 following the prolonged Movement Control Order (MCO) which began on March 18.

It said on Wednesday the MCO ruling has resulted in contractors reporting lower earnings (YoY) in 2020 amid the absence of construction activities.

“On a brighter note, the current government has re-iterated the resumption of approved projects like East Coast Rail Line (ECRL) and Pan Borneo Highway (PBH) in an effort to drive the economy.

“We expect the government to subsequently resume other long-awaited mega projects as well. In 2H20, we expect ECRL contract awards to intensify, while the Rapid Transit System (RTS) should be finalised in July, ” it said.

To recap, the research house said the KL Construction Index has underperformed the market thus far, plunging 18% year-to-date on the high-base effect in 2019, while the absence of rerating catalyst and sluggish sector earnings due to the pandemic also led to the KLCON Index underperforming.

Under its coverage, almost all contractors’ 1Q20 earnings missed expectations due to the MCO implementation, which resulted in slower progress billings.

UOB Kay Hian Research said the current government is committed to resuming approved mega project in an effort to drive economic growth.

The government reiterated the implementation of projects such as the ECRL and MRT2 projects, as well as approved projects earmarked under the last Budget 2020 (ie PBH Sabah).

“However, we expect the government to award these contracts in phases starting from 2H20 (instead of in one go), which probably will not excite the sector, ” it said.

The research house expects both Malaysia and Singapore governments to announce the resumption of Rapid Transit System (RTS) by end-July 2020 as both parties are finalising the negotiations (bilateral agreement, JV agreement and concession agreement).

In Penang, SRS Consortium has finally inked the master agreement with the Penang Government early in July to be officially appointed as the project delivery partner (PDP) for the RM32bil Penang Transport Master Plan (PTMP).

“The completion progress to date for the Pan Borneo Highway (PBH) for Sabah and Sarawak currently stand at 32% and 52% respectively (that is, on schedule).

Separately, the Sarawak state government has allocated RM1bil for three state constituencies in northern Sarawak which are earmarked for water supply projects, repair of old bridges, construction of new bridges, repair of longhouses, and rural electrification schemes.

The research house prefers contractors from the small/mid-cap space who with a strong track record with lean operating structure, are the frontrunner to clinch the revived projects, and are companies with sustainable earnings growth. Our top picks are Gabungan AQRS and Kerjaya Prospek Group.

Meanwhile, Gamuda has finally inked the long-awaited PTMP agreement on July 1.

“We upgrade Gamuda to Hold (from Sell) after its share price retraced by more than 10% after the signing announcement due to lingering uncertainty over the PTMP project, ” it said.

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