Ratings upgrade for local construction sector
KUCHING: The research arm of Kenanga Investment Bank Bhd (Kenanga Research) upgrades its rating call on the local construction sector from ‘neutral’ to ‘overweight’ as it expects better long- term prospects form the sector.
In a sector update report, Kenanga Research explained that its rating upgrade is premised on better earnings outlook due to minimal disappointments in the last reporting season.
It is also boosted by mega infrastructure news flow coming back to the limelight, and decent entry point for investors to accumulate construction stocks as the current valuation for KL Construction Index is reasonably cheap at 13.2 fold which is below its 5-year mean levels.
In the last reporting season, over 70 per cent of contractors under Kenanga Research’s coverage had met expectations in their performances and year on year (y-o-y) the bulk of the contractors under coverage have registered CNP growths ranging from 8 to 149 per cent.
“Furthermore, outstanding order-book for most of the contractors within our overage remains robust with more than 2- year earnings visibility, and we are also expecting higher job flows for 2018 of circa RM50 billion, excluding MRT3 and HSR, compared to RM36.2 billion in 2017,” the research arm added.
For the MRT3 and HSR, their contract flows are expected to begin during the second quarter of calendar year 2018 (2QCY18), with a combined estimated value of circa RM90 billion and its potential beneficiaries anticipated to be Gamuda Bhd (Gamuda), MMC Corporation Bhd (MMC), George Kent (Malaysia) Bhd (GKENT), Sunway Construction Bhd (Suncon), IJM Corporation Bhd (IJM)and YTL Corporation Bhd (YTL).
“However, we do highlight that even if any of these players were to win the above-mentioned projects, we do not expect any earnings contribution in the near term as the physical works for these project is only expected to commence earliest by end 2019.
“And apart from MRT3 and HSR, we are also expecting news flow from mega infrastructure projects like ECRL (RM60 billion), Pan-Borneo Sabah (RM12.8 billion), and government housing jobs.
“Jobs from the private sector would be from projects like Bukit Bintang City Centre and new development launches with beneficiaries such as IJM, Suncon, Gamuda, Ahmad Zaki Resources Bhd (AZRB), Gadang Holdings Bhd (Gdang) and Kerjaya Prospek Group Bhd (Kerjaya),” said the research arm.
Meanwhile, Kenanga Research guided that its concerns for the construction sector remain focused on human capital issues leading to higher overheads for contractors and escalating building material costs.
With that in mind, the research arm announced that they continue to choose WCT Holdings Bhd as their top pick in the sector as they have better confidence in the group’s new management capabilities since Tan Sri Desmond Lim emerged as a major shareholder in 2016, as well as the group’s unprecedented low share prices despite improving prospects.
“We believe that they have delivered a decent set of results within a short span of time and remains highly focused and committed to their de- gearing activities, especially on clearing property inventories.
“On the construction front, its outstanding order-book is still at record high of RM5.6 billion, which would last them for at least another two to three years.
“Furthermore, its share price has seen a year-to-date decline of 19 per cent trading at a compelling multiple at 1-year forward price earnings ratio of 16.1 fold, and we believe investors should take the opportunity to accumulate the stock.”