Construction valuations now at attractive prices
KUCHING: The construction sector is still plague with uncertainties, especially on the progress of several mega projects.
However, analysts believe that now is a good opportunity to buy on weakness/bottom fish selectively given that KL Construction Index ( KLCON) is currently trading at a lower level of 9.3-folds, which is below its five-year negative two standard deviation (SD) levels.
Kenanga Investment Bank Bhd’s research arm (Kenanga Research) in a report, highlighted: “Despite the lack of catalyst and uncertainty in the sector, we believe the selldown in the sector is overdone.
“KLCON is currently trading at only 9.3-folds which is below fiveyear negative two SD levels while most contractors’ outstanding order- book are at all-time high, which would easily provide two to three years earnings visibility that will help them weather through these tough times.”
However, the research team is still highly selective with its picks in the construction space and only view favourably the performance of Gamuda Bhd ( Gamuda), the leading contractor in Malaysia.
Meanwhile, on the current performance of the sector, Kenanga Research noted that since the 14th General Election ( GE14), negative news flows have clouded the construction sector with uncertainties on job replenishment prospect for the next two years, coupled with the review of project cost on mega infrastructure projects like MRT2, and LRT3 yet that are yet to be concluded.
“Year- to- date, KLCON performance is down by 36 per cent compared to KLCI’s gain of 0.8
Despite the lack of catalyst and uncertainty in the sector, we believe the sell-down in the sector is overdone.
per cent, weighed down by most of the contractors as highlighted in our previous strategy report with minimal signs of recovery due to prolonged uncertainties.
“We believe that in the medium term, that is; nine to 12 months, conclusion on the project costs for both MRT2 and LRT3 would be positive to the sector, albeit at a lower sum as we believe that the negative news flow on lower project cost has been priced in.
“Furthermore, contractors can continue with their work progress on the above mention projects reducing potential earnings risk,” it opined.
For the first nine months of 2018 ( 9M18), Kenanga Research noted that the total contracts win by the listed contractors amounted to RM12.7 billion ( excluding management contract signed by MRCB of circa RM18.4 billion), a drastic drop of 42 per cent yearon-year (y- o-y), which is still short of its optimistic expectations of RM20 billion to RM30 billion as project reviews took longer than expected.
“As we move into 4QCY18, we reckon that contract flows will remain sluggish and contracts secured by listed companies might only reach RM15 billion at best by year- end driven by projects like the development of Tenaga’s office block in Bangsar.
“Hence, we would be anticipating for more downside risk in earnings, especially when project cost review for MRT2 and LRT3 are currently underway,” it commented.
All in, Kenanga Research maintained its ‘ neutral’ call on the sector due to the persisting uncertainties, especially on the cost review for MRT2 and LRT3 as contractors are unable to continue to work on the project in full- swing and any further delay in concluding the cost would result in higher operating cost for contractors arising from idling cost coupled with the lack of direction in policy as contractors are unable to continue.
“Nonetheless, we maintain our view as highlighted in our previous strategy that we believe that this would be a great opportunity to bottom-fish as most of the contractors have seen minimal recovery from sell- down post GE14, which placed valuations at attractive levels, especially when most contractors’ outstanding orderbooks are currently at alltime high,” it added.
Kenanga Research