2017 a year of normalisation for constructors
KUCHING: This year is projected to be one of normalisation for the construction sector having witnessed a record showing of contract flows in 2016 at RM56 billion.
According to the research arm of Hong Leong Investment Bank Bhd ( HLIB Research), 2016’ s contract flows of RM56 billion was up 158 per cent year on year (y-o-y) and also surpassed the previous high of RM28 billion in 2012.
“Coming from a significantly higher base, it would only be rational to expect a downward normalisation in job flows for 2017 and expect this to come in at RM25 billion,” HLIB Research said.
HLIB Research noted in an industry insight that development expenditure for 2017 has been set at RM46 billion, flattish at two per cent y-o-y.
The research arm further noted that this should help sustain nominal construction output given its strong correlation ( 73 per cent) to development expenditure.
HLIB Research pointed out that as the 11th Malaysia Plan (11MP)
Coming from a significantly higher base, it would only be rational to expect a downward normalisation in job flows for 2017 and expect this to come in at RM25 billion. HLIB Research
which spans from 2016 to 2020 has an allocation of RM260 billion, 13 per cent higher than 10MP, subtracting the RM45 billion allocation for 2016 and RM46 billion for 2017 leaves a balance of RM169 billion for 2018 to 2020.
“Assuming this is spread equally over three years, spending momentum could pick up strongly in 2018 by 22 per cent to RM56 billion,” it said.
On another note, HLIB Research observed that real construction growth has outperformed overall gross domestic product ( GDP) since the first quarter of 2012 (1Q12).
The research arm’s economics team expected the outperformance of construction to persist into 2017 at 10 per cent against an overall GDP growth of 4.5 per cent.
On rollouts for this year, HLIB Research said that expected mega projects for 2017 include remaining packages of the MRT2 ( RM5 billion) in the first half (1H), LRT3 (RM9 billion) awards to begin in 1Q and potentially the mammoth ECRL (RM55 billion) towards end 2017 at earliest.
“Several catalytic developments have emerged in Greater KL which include TRX, Warisan Merdeka, BBCC, Bandar Malaysia, Kwasa Damansara and CCC.
“Collectively, these developments have GDV of at least RM275 billion and could potentially generate RM138 billion worth of works for contractors to undertake,” it added.
Despite its expected downward normalisation in contract flows for 2017, HLIB Research retained its ‘ overweight’ rating on the construction sector.
Following the record level of contract flows last year, the orderbook levels of most contractors under the research arm’s coverage have scaled to new highs.
To elaborate further, the average orderbook cover ratio within the research arm’s coverage now stands at 5.5-fold compared to the usual two-fold to 2.5-fold during previous periods of normalised contract flows.
“The significant expansion in cover ratio is expected to propel earnings growth once execution on the orderbook takes place.
“In short, 2017 is expected to be a year of earnings delivery for contractors,” it said.