PETALING JAYA: The worst is likely over for the construction sector.
With improved order book replenishment, gradual return of foreign workers and easing of building material prices, the sector is poised for a better financial performance this year.
Aside from the projected better earnings growth for 2023, the sector is also ripe for a general re-rating on expectation of fresh awards of public infrastructure jobs after a long drought of contracts.
Given the favourable factors, Kenanga Research reiterated its “overweight” rating on the construction sector. The brokerage said the recommendation was premised on better order book replenishment and earnings prospects in 2023.
“With an all-time high development expenditure allocation in the revised Budget 2023, we foresee better job replenishment prospects, coupled with the imminent rollout of Mass Rapid Transit 3 (MRT3) and Pan Borneo Highway (Phase 2),” Kenanga Research explained in its report.
“Meanwhile, as multinational corporations diversify their manufacturing bases geographically away from China to de-risk, there are opportunities in the construction of new semi-conductor plants and data centres locally where the contract sizes are relatively larger, ranging between RM1bil and RM1.5bil each,” it added.
Kenanga Research said it expected the construction sector’s earnings prospects should improve in 2023, given the gradual return of foreign workers and the lower base metal prices (steel and aluminium) and other key building material prices such as diesel and bitumen on the back of weaker oil prices.
“Most new contracts currently under negotiation would incorporate the latest prices, which are higher, and also with an element of price variation built in – to protect margins in the event of huge swing in material prices,” it said.
“Hence, we believe overall margins should gradually improve as the older low-margin jobs trail off and replaced by new projects adjusted for higher input costs kick in,” it added.
Kenanga Research named Gamuda Bhd as its top pick for the sector.
This was due to the company being the front-runner for the tunnelling job for MRT3; its job wins in Australia and Singapore that was indication of its competitiveness in the international market; its strong war chest after the disposal of its toll highways; its strong earnings visibility underpinned by a record high outstanding order book of RM22bil; and its efforts to expedite growth in the renewable energy space in line with global sustainability goals.
For the fourth quarter ended Dec 31, 2022, construction counters under Kenanga Research’s coverage saw unchanged sequential earnings performance, with 33% and 67% coming in above and within its forecasts, respectively.
Among those that outperformed, Kenanga Research noted Sunway Construction Group Bhd (SunCon) saw a lumpy fourth quarter performance derived from cost savings for projects nearing completion, while Kimlun Corp Bhd’s positive tax returns drove earnings.
However, the margins realised by most contractors in 2022 were still below the pre-Covid levels due to the soaring cost of building materials, particularly steel, cement, and labour shortages that hampered work progress.
Gamuda and SunCon were the only exceptions, with construction margins being stronger than pre-Covid levels due to cost savings from projects nearing completion, Kenanga Research noted.