Cautious optimism for construction’s road to recovery


While things are looking brighter, MIDF Research head Imran Yassin Yusof says there are still “speed bumps” on the road to recovery for construction. “We are cautiously optimistic,” he tells StarBizWeek.

WITH the relaxation of movement restrictions, optimism is returning to the construction sector which suffered disrupted activities and reduced productivity due to Covid-19.

Analysts see construction activities picking up in the fourth quarter of 2021, driven by accelerated billings from order book backlogs.

According to them, a full reopening of the construction sector looks possible by October following the government’s decision to allow industry capacity to go up to 100% if companies’ get their workers fully inoculated.

While things are looking brighter, MIDF Research head Imran Yassin Yusof says there are still “speed bumps” on the road to recovery for construction.

“We are cautiously optimistic,” he tells StarBizWeek. According to him, the construction sector was one of the research firm’s recovery plays at the start of the year. But this got a bit delayed due to the resurgence of Covid-19 and subsequent movement restrictions, which had impacted companies’ earnings in the second quarter of 2021.

That said, there is still wariness on the ground although many economic sectors have reopened. This is also true for construction, which may see nervous clients holding back projects for a while.

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Analysts do not discount the possibility of any intermittent coronavirus outbreak at sites leading to operational constraints that would slow down progress billing.

One impetus for the sector, Imran says, is the tabling of the 12th Malaysia Plan (12MP) later this month where infrastructure development projects could be announced to stimulate the economy and the job market. The next event to look out for is Budget 2022.

However, some think the upcoming Budget is likely be uneventful for the sector with the government’s focus remains on aiding the more adversely-affected tourism and retail sectors, besides improving the public healthcare system and cash assistance for low-income groups.

“The government might reiterate projects previously mentioned in Budget 2021 such as the Mass Rapid Transit Line 3 (MRT3) and Pan Borneo Highway but this is unlikely to spur interest in the sector.

“We believe the construction sector’s prospects will only show significant improvements after the next general election (due in 2023), once the country has a more stable government,” opines UOB Kay Hian (UOBKH) Research in a Sept 7 report.

For the near term, some factors could still stand in the way of the sector’s return to normalcy. Higher operating costs from Covid-19 standard operating procedure compliance and rising raw material costs such as steel, which is currently priced at RM3,200 per tonne as compared to RM2,650 per tonne in January, would eat into margins of existing projects.

In the second quarter of 2021, UOBKH says earnings of construction firms under its coverage were disappointing due to the prolonged lockdown, which affected their productivity level and caused supply chain disruption.

During the period, the workforce capacity was capped at only 60% and there were further restrictions on the scope of permitted construction activities. Even so, analysts note that the work disruptions in the second quarter were much less severe on a year-over-year basis as construction works were halted completely for almost a month in the second quarter of 2020.

Mirroring the earnings disappointment, the KL Construction Index is down 8.6% year-to-date versus the FBM KLCI Index’s -2.9%, points out UOBKH.

At this level, the sector is trading at an inexpensive price-to-book of 0.74 times 2022 forecast versus the five-year historical average of 0.93 times.

UOBKH says third-quarter 2021 earnings are likely to remain lacklustre due to the enhanced movement order implementation starting early July.

“We could expect an acceleration of construction billings recognition and a pick-up in property sales from as early as the fourth quarter of 2021 or first quarter of 2022.

“The tabling of the Malaysia 12MP on Sept 27 might catalyse a sector-wide share price rally but we recommend investors to take profit with the view that the optimism could be shortlived, as the plan may take some time to materialise,” it adds.

On projects to look out for, it said the MRT3 is one. From the MRT Corp’s guidance, contracts for the RM30bil rail project would be awarded from the fourth quarter of 2021 or early next year – benefiting players along the supply chain, especially the main contractors with rail expertise such as Gamuda Bhd and MMC Corp Bhd, for the underground section, says analysts.

Other potential beneficiaries are Sunway Construction Group Bhd, IJM Corp Bhd and WCT Holdings Bhd.

According to UOBKH, the project could come in a hybrid structure via private funding of up to 30%. The construction period, meanwhile, would be longer with five phases to be rolled out over 10 years versus seven years previously.

The research firm also expects more concrete progress on the contracts rollout of other projects announced in Budget 2021 such as the Pan Borneo Highway and other smaller infrastructure projects in Sabah and Sarawak.

Where bids for overseas jobs go, Gamuda expects the results of its Australian job tenders, namely the Sydney West Metro Central/Western Tunnelling and Airport Link packages, to be announced by the end of the fourth quarter.

Other mega projects that may be featured in the 12MP are the domestic high-speed rail and the Serendah-Port Klang Rail Bypass, say analysts.

As for current infrastructure projects, works for MRT2 and Light Rail Transit Line 3 are in progress and expected to be completed in July 2022 and Feb 2024, respectively. Nine system works contracts worth RM1bil for the Johor Baru-Singapore Rapid Transit System (RTS) Link have been awarded and is targeted for completion by end-2026.

As for the East Coast Rail Link (ECRL), while Section C has hit a snag after the federal and Selangor state government could not reach an agreement on the alignment, other sections are progressing well, reaching 21% as of March this year, notes UOBKH.

In the pipeline is also the Pan Borneo Highway Sabah project, while the Sarawak portion is expected to hit 70% completion rate by the end of 2021 for the 11 packages awarded previously. Full completion of the latter is expected by 2022-2023.

However, a risk would be a slower-than-expected rollout of projects, especially those that have been approved, resulting in the depletion of contractors’ outstanding order books due to a shrinking pool of new contracts, say analysts.

Coming to exposure to the sector, MIDF’s Imran says the firm’s top picks are Gamuda and Sunway Construction.

The latter saw its net profit grow nearly four-fold to RM8.32mil in the second quarter of financial year 2021. Despite the challenging economic landscape, the group secured new contracts worth RM620mil and maintained a healthy outstanding order book of RM4.8bil as at June 30, 2021.

Gamuda’s net profit for the third quarter ended April 30, 2021, meanwhile, rose more than three-fold to RM141.83mil, led by stronger profitability of its construction, property and toll concession businesses. As at end-April, it had an outstanding order book of RM4.9bil.

Meanwhile, UOBKH has “buy” calls on Kerjaya Prospek Group Bhd and WCT.

“Kerjaya Prospek has a lower reliance on government projects, an ability to clinch private sector jobs and consistent internal job flows. It also has a solid net cash position of RM196mil as of end-June to weather the pandemic. Share price weakness is an opportunity to collect,” says the research firm.

On WCT, it says the group aims to raise RM1bil of cash through various exercises and this should help reduce its gearing level, lower financing cost and improve earnings. The stock is also one of the potential beneficiaries of the Pan Borneo Highway project, it adds.

WCT recently announced the disposal of its Sungai Buaya land for RM214.3mil and expects to record a disposal gain of RM45.5mil from the transaction. The disposal – in line with the company’s asset monetisation plan – at book value should also reduce the stock’s price-to-book discount, adds UOBKH.

The research firm has a RM1.38 target price for Kerjaya Prospek and 93 sen for WCT.

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