Recovery remains in sight

Maybank Investment Bank (IB) Research has a “buy” on Gamuda Bhd, IJM Corp Bhd and Lingkaran Trans Kota Holdings Bhd. (File pic shows a general view of housing/property development and construction building at Gamuda Garden, Rawang. - The Star)

PETALING JAYA: The construction sector continues to face multiple headwinds due to Covid-19 with contract roll-outs muted in tandem with the slower-than-expected economic recovery.

The government’s announcement that the Mass Rapid Transit Line 3 (MRT3) project will begin work during the second half of the year, has injected some optimism and improved trading sentiment on construction stocks.

Underpinned by the country’s vaccination efforts, analysts said this will eventually “prime the sector for a re-opening play”.

In the meantime, they advocate being selective in stock picks, preferring those with a strong balance sheet and delivery track record.

Maybank Investment Bank (IB) Research has a “buy” on Gamuda Bhd, IJM Corp Bhd and Lingkaran Trans Kota Holdings Bhd.

For Kenanga Research, it prefers counters that have a predictable set of catalysts lined up, coupled with robust execution and earnings delivery capabilities.

“These names include Gamuda, Kerjaya Prospek Group Bhd and Kimlun Corp Bhd. That said, we note that our recovery thesis hinges over the nation’s rate of Covid-19 recovery, ” it said in a report.

However, with fiscal consolidation likely to be of priority post Covid-19, Maybank IB anticipates two major trends in the sector.

One is the private finance initiative or PFI as the financing mode for new major infrastructure projects, while the second is the potential restructuring of highway concessions to alleviate the government’s fiscal burden.

“Government net development spend in the first quarter of 2021 was down 24% quarter-on-quarter to RM15.3bil, at 22% of the RM68.2bil allocated under Budget 2021.

“View from the ground is that new public spending for infrastructure has been slow year-to-date. We expect this situation to persist into the second half of the year as focus will remain on pandemic management, and in mitigating livelihood impact, ” it said in a report.

The bank’s economics team forecasts the 2021 fiscal deficit to widen to -6.8% of gross domestic product (GDP) versus 2020’s -6.2%, after factoring in the additional direct fiscal injection from the stimulus packages announced year-to-date and downward revision to GDP growth forecast.

“Against such a backdrop, we see new major infra projects to be taken on via the PFI or deferred payment financing model. Elsewhere, the postponement of toll rate hike involving 20 highways this year, requiring RM2.1bil in government compensation, is a yearly recurring operating expenditure, ” it said.

In this respect, it said Gamuda’s planned RM5.2bil highway trust, offering no toll hikes and cash outflow (and guarantee) by the government, merits consideration. An alternative to this would be an ‘infrastructure REIT’ structure, added Maybank IB.

Meanwhile, MIDF Research believes the recovery momentum of the construction sector remains in sight.

It noted that presently, the sector is still allowed to operate at 60% capacity while adhering to the standard operating procedure in place.

This indicates a promising recovery in construction work progress upon resumption of economic activities.

which will continue in the second half of the year given the progressive vaccination programme and the gradual four-phase economic reopening plan, said the research firm.

“This is premised on potential implementation of catch-up strategies to make up for the loss time, resulting in higher progress billings underpinned by the solid outstanding order book of the construction companies under our coverage which provide earnings visibility for the next three to four years.

“We are comforted that there was no major cancellation of contract award throughout the period, merely a delay in revenue recognition as work progress was affected by the movement control order, ” it added.

MIDF said it continues to favour construction companies venturing overseas to boost their order book size in a bid to reduce their dependence on the domestic market.


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