Building on the uptrend

PETALING JAYA: The Construction Index of Bursa Malaysia has not just rallied by over 11% since the start of 2023, it is also one of the best performers this year.

The rally has, in fact, “just started”, a fund manager told StarBiz.

Areca Capital chief executive officer Danny Wong also said that more investors, including foreign funds, could increase their presence in construction stocks with strong fundamentals.

Rakuten Trade head of research Kenny Yee, however, thinks that it is too early to label the uptrend in construction stocks as a “rally”.

“The construction stocks are just playing catch up after underperforming for so many years.

“In fact, the whole sector is still trading below its historical valuation,” he said.

The once sleepy construction sector has found renewed investor interest as the market is expecting some positive newsflow ahead, according to Yee.

“The market anticipates seeing more infrastructure and construction projects to be announced by the federal government,” he noted.

Echoing a similar view, Areca Capital’s Wong said Budget 2024, slated to be tabled in two months’ time, is likely to contain announcements on major infrastructure projects that would further drive construction activities.

Last month, Deputy Finance Minister Datuk Seri Ahmad Maslan said Budget 2024 is scheduled to be tabled in the Dewan Rakyat on Oct 13.

Apart from the budget catalyst, a gross domestic product growth of 4% to 5% this year could sustain the sentiment in the construction sector, Wong added.

He pointed out that investors are looking into the construction sector once again on the back of improved confidence in the country’s growth potential.

“The construction sector, along with several other sectors, have been ‘under-owned’ by investors as they were affected by the Covid-19 pandemic and soft economic conditions.

“But now, after three years of uncertainty, we are moving back towards growth.

“Naturally, the construction sector will be one of the main beneficiaries as it has a high multiplier effect on the economy,” he said.

Last month, the multi-billion-ringgit Kuala Lumpur-Singapore high-speed rail (HSR) project, which was terminated in January 2021, was revisited.

On July 27, a request for information (RFI) briefing was held for the HSR project, which was attended by over 700 representatives from local and foreign firms, as well as foreign missions.

In a note following the RFI briefing, CGS-CIMB Research estimated that the revival of the HSR will conservatively add another RM35bil in construction works to two other visible projects – the RM45bil Mass Rapid Transit 3 (MRT3) and RM32bil Penang Transport Master Plan.

“More importantly, it also shows that the current government is pragmatic and the narrative on being pro-growth is coming to fruition, in our view,” it said.

Moving forward, Areca Capital’s Wong said Malaysia needs more high-value infrastructure projects to further accelerate the economic growth.

“The construction big-boys will be the first to benefit and followed by the smaller players.

“The spillover effect will then benefit other sectors such as financial services and building material manufacturers,” he added.

Since the start of the year, many construction stocks have woken from deep slumber.

WCE Holdings Bhd, the concessionaire for the West Coast Expressway, has seen its share price rising by almost 132% year-to-date, lifting its market capitalisation to RM2.1bil.

Gamuda Bhd, the largest listed construction company, witnessed a 16.4% increase in share price in the same period. Gamuda has a market capitalisation of about RM11.7bil.

Shares of Sunway Construction Group Bhd rose by 11.3% so far this year, while Muhibbah Engineering (M) Bhd is up by 24.5%.

However, not all companies have benefited from the renewed investor interest in the construction sector.

Construction giant IJM Corp Bhd declined by over 3.8% year-to-date, while shares of George Kent (M) Bhd fell by 9.6% in the same period.

Overall, the Construction Index has risen by 11.2% since January. In the last month alone, the index is up by over 3%.

A local analyst told StarBiz that the uptrend in construction stocks may sustain if the “unity government” – referring to Pakatan Harapan and Barisan Nasional - performs better than expected in the upcoming six state elections.

“This would provide a feel good factor and a confirmation that the federal government’s move to drive the economy, including in boosting infrastructure development spending, will continue.

“The market is always driven by sentiment and a win by the unity government will provide a positive sentiment,” the analyst said.

Last week, Kenanga Research also said that an acceleration in the rollout of mega projects can be expected, assuming a market-friendly outcome of the state elections on Aug 12.

Among the mega projects it mentioned were the RM45bil MRT3 and six flood mitigation projects reportedly to be worth RM13bil, including flood mitigation works at Sungai Johor, the construction of the Sungai Klang-Sungai Rasau dual-function reservoir and the Sungai Golok Integrated River Basin Development Phase 3.

“There will also be an accelerated disbursement of the massive RM97bil gross development expenditure budgeted under Budget 2023.

“For ongoing projects in Sabah and Sarawak such as Pan Borneo and Sabah Sarawak Link Road, the government has earlier provided commitment to accelerate and expedite these projects,” it said.

Looking ahead, Wong recommended investors to consider large construction stocks, especially those that are “too big to ignore” for mega construction projects.

“That said, smaller companies may also benefit from such projects by virtue of being subcontractors to the larger construction players,” he said.

Rakuten’s Yee also preferred large construction players such as Gamuda and IJM.

“IJM, in particular, could be a dark horse.

“Other potential stocks to look at include Kerjaya Prospek Group Bhd and companies that provide services to construction companies such as HSS Engineers Bhd, which provide consultancy services,” he said.

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