Uncertainties continue in construction sector
KOTA KINABALU: Uncertainties in the construction sector is expected to continue in the immediate term as status of several mega infrastructure projects and government policies have yet to be officially confirmed.
While it has been confirmed that LRT3 will continue with a reduce budget and revised plan and the MRT3 has been cancelled, the status of the RM81 billion East Coast Railway Link (ECRL) and the RM110 billion High Speed Railway (HSR) Singapore-KL project which has been deferred for two years is currently unclear.
In a sector update by MIDF Amanah Investment Bank Bhd (MIDF Research), the research arm stated that they opine the governments are still mulling on the option available and that further cost reductions would be more desirable for the situation.
While the cancellation of the MRT3 was a huge shock to the industry, the research guided that they would not be ruling out any positive outcomes moving forward as the government continue with their feasibility studies on the aforementioned projects.
“We believe that government policies and restrictive elements on government finances, are pointing towards a further slowdown for infrastructure expenses in fourth quarter of calendar year 2018 (4QCY18).
“Thus, development spending
We believe that government policies and restrictive elements on government finances, are pointing towards a further slowdown for infrastructure expenses in fourth quarter of calendar year 2018 (4QCY18).
could be the first component impacted as the government realigns its priorities in the soonannounced Budget 2019 in early November.
“We are expecting some cut back in projects and infrastructure investments, owing to its cancellation or postponement,” said the research arm.
The change in government attitude and policies to our expensive mega-infrastructures since GE14 has cause business confidence to be impacted negatively in the recent months. Most notably, the construction sector went down by -7.7 per cent in 3QCY18 but this rate was narrowed from the 2QCY18 decline of 24.8 per cent.
Consequently, indicators such as the convergence of price-to-book (PB) and price-to-earnings (PE) ratios which were lofty at 18 to 23folds have subsided to 15 to 11-folds. This is balanced by a level of PB of 0.85 folds.
“In searching for parallel, similar scenario has occurred during the fallow period between January 12 to April 13 where the KL Construction Index traded between the ranges of 11.4 to 14.4folds. The period lasted for over 14 months. Hence, we estimate that revival for projects would potentially resume in 1QFY20,” opined the research arm.
“While the index could see further improvement moving forward, it is apparent that the change in policy is highly sensitive to the sector and given the current uncertainties, we believe the lack of clarity will continue to put immediate term hurdles to our construction stocks’ price performance.
“In contrast, liquidity continued to mop-up the sector where in July-18, RM8 billion of loans was disbursed to the sector which is above the mean of RM4.2 billion. We reckon that loans disbursed to the sector will gradually decrease to the ranges of RM4.7 billion to RM5.7 billion in upcoming months following the indicator of the dwindling business confidence index.
“Furthermore, current lower PE multiples correlating liquidity levels elucidates the view of the setback of earnings prospects,” said the research arm.
All things considered, MIDF Research maintained its neutral stance on the construction sector at this juncture with a cautious overtone on its immediate term prospects.
“This is to reflect on the government new policies that would be reducing the potential orderbook replenishment rate for FYE19 to FYE20,” they explained.
MIDF Research