Careful optimism for the construction’s recovery path

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

Analysts expect construction activity to pick up in the fourth quarter of 2021, driven by accelerated billing from order backlogs.

They said the construction sector could fully reopen by October after the government decided to increase industrial capacity to 100% if companies fully vaccinate their workers.

While things are looking better, Imran Yassin Yusof, director of MIDF research, says there are still “speed bumps” on the road to recovery for construction.

“We are cautiously optimistic,” he tells StarBizWeek. The construction sector, in his opinion, was one of the research company’s recovery spots at the beginning of the year. However, this was delayed somewhat due to the resurgence of Covid-19 and subsequent restrictions on movement that had impacted companies’ profits in the second quarter of 2021.

Nonetheless, there is still caution on the ground, despite the fact that many economic sectors have reopened. This also applies to the construction sector, which can cause nervous customers to hold off projects for a while.

Construction index

Analysts are not ruling out the possibility of an intermittent coronavirus outbreak at locations, causing operational restrictions that would slow progress billing.

A boost for the sector, says Imran, is the presentation of the 12th Malaysia Plan (12MP) late this month, which could announce infrastructure development projects to stimulate the economy and the labor market. The next event to watch out for is the 2022 budget.

However, some believe the upcoming budget for the sector is likely to be uneventful as the government’s focus continues to be on helping the more depressed tourism and retail sectors, alongside improving the public health system and providing cash aid to low-income groups.

“The government could repeat the projects previously mentioned in the 2021 budget, such as the Mass Rapid Transit Line 3 (MRT3) and the Pan Borneo Highway, but this is unlikely to generate any interest in the sector.

“We believe that the prospects for the construction sector will only improve significantly after the next general election (2023), once the country has a more stable government,” said UOB Kay Hian (UOBKH) Research in a September 7 report.

In the short term, a number of factors could prevent the industry from returning. Higher operating costs due to compliance with the Covid-19 standard operating procedures and rising raw material costs such as steel, which is currently at 3,200 RM per tonne compared to 2,650 RM per tonne in January, would reduce the margins of existing projects.

UOBKH said the construction companies it covered were disappointing in the second quarter of 2021 due to the prolonged lockdown that impacted their productivity levels and caused a disruption in the supply chain.

During the reporting period, the staffing capacity was only limited to 60% and there were further restrictions on the scope of the permitted construction activities. Still, analysts note that the work stoppages in the second quarter were much less severe compared to last year, as construction work was completely halted for almost a month in the second quarter of 2020.

As a reflection of the disappointment in profits, the KL Construction Index has fallen by 8.6% compared to the FBM KLCI Index with -2.9% since the beginning of the year, emphasizes UOBKH.

At this level, the sector is forecast to have a favorable price-to-book ratio of 0.74 times 2022 compared to the historical five-year average of 0.93 times.

UOBKH says third quarter 2021 results are likely to remain lackluster from early July due to improved execution of movement orders.

“As early as the fourth quarter of 2021 or the first quarter of 2022, we could expect the recording of construction invoices to accelerate and real estate sales to pick up.

“The Malaysian 12MP submission on September 27 could spark a sector-wide stock price rally, but we encourage investors to take profits as optimism may be short-lived as the plan can take some time to complete,” he added.

On projects to watch out for, the MRT3 was said to be one. According to the guidelines of MRT Corp, contracts for the RM30bil rail project would be awarded from the fourth quarter of 2021 or the beginning of next year – which will benefit the actors along the supply chain, especially the prime contractors with rail expertise such as Gamuda Bhd and MMC Corp Bhd, for the underground section, say 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 through private funding of up to 30%. The construction time would meanwhile be extended with five phases, which are to be rolled out over 10 years, compared to seven years previously.

The research firm also expects more concrete progress on contract launches for other projects announced in the 2021 budget, such as the Pan Borneo Highway and other smaller infrastructure projects in Sabah and Sarawak.

Gamuda expects the results of its Australian job postings, namely the Sydney West Metro Central / Western Tunneling and Airport Link packages, to be announced by the end of the fourth quarter.

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

As for the current infrastructure projects, work on MRT2 and Light Rail Transit Line 3 is underway and is expected to be completed in July 2022 and February 2024, respectively. Nine system construction contracts worth RM 1 billion for the Johor Baru-Singapore Rapid Transit System (RTS) link have been awarded and are expected to be completed by the end of 2026.

As for the East Coast Rail Link (ECRL), while Section C has run into trouble after the federal and Selangor state governments failed to reach an agreement on the route, other sections are making good progress, hitting 21% as of March this year, notes UOBKH.

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

A risk, however, would be slower than expected rollouts of projects, especially those approved, which would result in contractors’ outstanding order books being used up due to a shrinking pool of new contracts, analysts say.

In terms of exposure to this sector, MIDF’s Imran says the company’s top picks are Gamuda and Sunway Construction.

The latter recorded an almost four-fold increase in net profit to RM 8.32 million in the second quarter of fiscal year 2021. Despite the difficult economic environment, the group secured new contracts worth 620 million June 30, 2021.

Gamuda’s net income for the third quarter ended April 30, 2021, meanwhile, more than tripled to RM141.83 million, led by stronger profitability in its construction, real estate and toll concession businesses. At the end of April it had an outstanding order backlog of RM 4.9 billion.

Meanwhile, UOBKH has issued calls to buy to Kerjaya Prospek Group Bhd and WCT.

“Kerjaya Prospek has less reliance on government projects, is able to attract private sector jobs, and has a consistent internal flow of jobs. It also has solid net cash of RM196 million as of the end of June to weather the pandemic. The share price weakness is an opportunity to accumulate, ”says the research company.

WCT states that the group intends to raise RM 1 billion in cash through various exercises, which should help lower their gearing levels, lower financing costs and improve earnings. The stock is also one of the potential beneficiaries of the Pan Borneo Highway project, she added.

WCT recently announced the sale of its property in Sungai Buaya for RM 214.3 million and expects a capital gain of RM 45.5 million from the transaction. The sale – in line with the company’s monetization plan – at book value should also reduce the price-to-book discount on the stock, adds UOBKH.

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

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