Earnings delivery remains thematic play for construction sector
KUCHING: Given the slew of contracts won by contractors back in current year 2016 (CY16), the research arm of Kenanga Investment Bank Bhd (Kenanga Research) strongly believes that the theme for this year is earnings delivery.
According to Kenanga Research, CY16 was a great year for contractors as there had been RM56.2 billion worth of construction jobs clinched by the public- listed players, representing a 155 per cent increase from CY15.
“However, we expect news flow and construction awards to taper off from CY16 level as the major increase in jobs flows in CY16 were mainly from the MRT2 and Pan Borneo Sarawak which made up 60 per cent of entire CY16 value award of RM56.2 billion,” the research arm said.
In terms of expectations for CY17, Kenanga Research is looking out for news flow from LRT3 (RM9 billion), Pan-Borneo Sabah (RM12.8 billion), GemasJB Southern track (circa RM9 billion with the assumption that 30 per cent will be subcontracted out to local contractors) and government housing jobs, while jobs from the private sector would be from projects like Bukit Bintang City Centre and new development launches with IJM Corporation Bhd ( IJM), Sunway Construction Group Bhd, Gamuda Bhd ( Gamuda), Ahmad Zaki Resources Bhd, Gadang Holdings Bhd and Kerjaya Prospek Group Bhd as likely beneficiaries.
Hence, collectively the research arm anticipated contract awards to be at the range of RM25 billion to RM30 billion for 2017, which is lower by 56 per cent to 47 per cent.
Kenanga Research noted that this excludes the muchtalked about East Coast Rail Line (ECRL) (expected contract amount of RM55 billion with 30 per cent local participation requirement).
While news reported recently that the construction awards for ECRL could start as early as July as its tender could come as early as April, the research arm anticipated the contract award news flow for bigger jobs to materialise earliest by the fourth quarter of CY17 (4QCY17) or 1QCY18 as bigger jobs tend to go through a longer tender progress, with similar timeline is also expected for the High Speed Rail.
“In the event that the ECRL awards came in earlier before 4QCY17 or 1QCY18, this would be a re-rating catalyst for the sector and we believe key beneficiaries would be bigger names like IJM, Gamuda, and George Kent (Malaysia) Bhd,” it said.
Apart from infrastructure and building works, the research arm also expected more contract news flow relating to road works maintenance given that the government have allocated RM4.6 billion for state road maintenance coupled with expectation that the general election is around the corner, beneficiaries to look out for are names like Protasco Bhd, Cahya Mata Sarawak Bhd (CMS), and UEM Edgenta Bhd.
“We strongly believe that given the slew of contracts won by contractors back in CY16, the theme for this year is earnings delivery, as our major concern for contractors is their ability to deliver their numbers in CY17, especially after they had enjoyed good run ups backed by strong contract award flows, which have built in high expectations for the sector,” Kenanga Research stressed.
The research arm noted that high building material cost is a further dampener to contractors’ earnings given that local long steel prices are currently trading at strong levels of RM2,140 to RM2,290 per tonne, driven by cost push factors such as higher raw material prices (coal, iron ore, scrap) and the lower volume of China imports.
While Kenanga Research has already factored in higher operating costs that are reflected in its earnings revision in the recently concluded results season, the research arm remained cautious of further disappointments that lie ahead as delays and unexpected cost issues seems to be rampant.
In view of slower contract flows for the year, higher execution risks, while valuations are at two-year high, Kenanga Research downgraded the construction sector to ‘neutral ’from ‘overweight’ previously.