Builders on track for continuing, solid growth with project flows

Tradeview Capital Sdn Bhd chief executive officer Ng Zhu Hann.

THE construction industry, a vital pillar of the nation’s economy, is witnessing a significant revival.

With ambitious infrastructure projects, increased foreign investments, and robust government support, the sector is currently turning heads.

Notably, the Bursa Malaysia Construction Index is now hovering above 300 points, a level unseen since early 2018. Year-to-date (ytd), the index has risen 66% to 319 points.

Construction stocks have also shown remarkable ytd returns, with Gamuda Bhd up by 79% to RM8.20, Sunway Construction Group Bhd (SunCon) surging more than two-fold to RM5.02, and IJM Corp Bhd almost doubling to RM3.64.

While one expert attributes the construction sector’s revival to overall improvements on the local bourse that have cascaded down to various industries, another believes a significant part of the resurgence is due to increased investments in infrastructure projects and data centres.

Both experts are optimistic about the sector’s future, expecting it to continue thriving owing to the ongoing news of infrastructure projects.

Ng Zhu Hann, chief executive officer of fund management company Tradeview Capital Sdn Bhd, tells StarBizWeek that the last time the sector saw such a similar landscape was in 2018, driven by major infrastructure projects like the mass and light rail transit projects rolled out by the then-Barisan-Nasional-led government.

He says subsequent governments did not introduce any major infrastructure projects, and the property sector experienced a downturn, leading to a lack of substantial jobs for the entire construction industry.

“This year is very different. The property market has rebounded from a low, and many projects are now up and running or commencing. A significant part of this revival is due to the rise of infrastructure projects and data centres,” Ng notes.

He says these high-value jobs offer excellent earnings visibility within the first 24 to 36 months, which has driven the share prices of companies like Gamuda, SunCon, and IJM to strong performances over the past 12 months.

“The bright prospects explain the robust growth in their share prices,” he adds.

While Ng emphasises the impact of major infrastructure projects and a rebounding property market on the construction sector’s revival, Kenny Yee, head of research for online broker Rakuten Trade Sdn Bhd, attributes the sector’s resurgence to overall improvements within the local bourse that have cascaded down to various sectors.

“We have been talking about the construction sector since last year, but nothing happened. Only now, when interest is flowing in, do we see tangible improvements,” he notes.

When asked if this upward momentum is likely to continue, Yee expresses optimistism due to the promising infrastructure projects in the near future.

“The construction sector thrives on news flows, and we are expecting plenty to come, especially those related to infrastructure, rail projects and others,” he adds.

Ng, meanwhile, sheds light on the shifting dynamics within the industry. He says that, originally, tier-one contractors like IJM, SunCon, and Gamuda relied heavily on residential, industrial, and commercial projects to sustain earnings, especially when there were no major infrastructure projects over the past five years.

“However, these companies have now moved up the value chain, focusing on high-value jobs such as infrastructure and data centres, while outsourcing lower-margin residential projects to tier-two and tier-three firms,” he says.

Ng notes that smaller firms like Inta Bina Group Bhd and Crest Builder Holdings Bhd are now securing jobs that were traditionally dominated by tier-one firms.

“This shift allows tier-one companies to concentrate on larger, more profitable projects while providing new income opportunities for tier-two and tier-three firms. Consequently, these smaller firms are now winning better jobs with higher margins, enhancing their earnings,” he adds.

As a result, Ng says he believes the momentum for the construction industry will likely continue, not just for tier-one companies whose share prices have already surged, but also for tier-two and tier-three firms that are beginning to see significant earnings and share-price growth.

However, it is important to note that the index is currently trading at a price-earnings (PE) ratio of 42 times. Is this valuation justifiable?

Ng says: “If you look purely at PE ratios, it’s definitely expensive.”

But, he adds, the reason for this high valuation is that the market is now factoring in future earnings, which have not yet materialised in terms of numbers.

“A very good telltale sign will be the earnings reported over the coming quarters. If these earnings match market expectations, then the PE ratio will come down as the share prices improve. However, if the earnings do not meet expectations, the share prices will correct themselves,” he explains.

Similarly, Yee says justification for the valuation will largely depend on the companies’ earnings and upcoming contract announcements.