Earnings prospects still strong within construction sector

KUALA LUMPUR: The construction sector’s earnings prospects are still strong, analysts project, with most players sitting on record order books.

While seemingly negative, AmInvestment Bank Bhd (AmInvestment Bank) did not believe the latest development warranted a downgrade of the sector overall thanks to various projects in play.

“The sector’s earnings prospects remain strong with most players sitting on record order books, thanks to the rollout of the Pan Borneo Sarawak highway (RM16 billion), MRT2 (RM32 billion) and LRT3 (RM12 billion) in recent years,” the research firm said.

“The players’ order backlogs could only go up further over the medium term with another wave of mega projects including the Pan Borneo Sabah highway (RM12.8 billion), ECRL (RM55 billion) and Kuala Lumpur - Singapore highspeed rail worth between RM50 to RM60 billion).”

AmInvestment Bank noted that in the basic infrastructure space, the government remains committed to spending on roads, bridges, schools, hospitals, public housing, water and electricity supply.

It further saw that under Budget 2018, despite financial constraints, the gross development expenditure has been kept at 2017’s level of RM46 billion.

While maintaining its ‘overweight’ stance on the construction sector, AmInvestment Bank was mindful that the market is pricing in a higher risk premium, which is weighing down share prices of construction stocks.

The research firm believed the slight de-rating of the sector has been triggered largely by the surprised move by MRT Corp to introduce a “build and finance” model for MRT3 that gives an upper hand to foreign contractors with strong financial backing from their governments, i.e. the Chinese and Japanese.

“Not helping either is investors’ increased cautiousness towards construction stocks ahead of the 14th general election, as construction stocks are generally perceived to be vulnerable to policy changes,” it said.

Key risks for the construction sector included that the government is to embark on an austerity drive, resulting in mega and basic infrastructure projects being scaled down, postponed or cancelled.

Other key risks were the escalation in key input costs, particularly steel and labour, along with liquidated and ascertained damages (LADs) due to late delivery arising from labour shortage, delays in construction site handover, construction site mishaps, unforeseen ground conditions, challenges in relocation of utilities and traffic diversion.

Legal disputes with clients, subcontractors or suppliers were also deemed key risks for the construction sector.