Muted earnings for contractors
Construction firms hit by downturn in contracts in second-half 2018
PETALING JAYA: Construction companies are expected to see muted earnings in the fourth quarter of financial year 2018, reflecting the impact of the downturn in contracts, especially in the second half of last year.
CIMB Equities Research said based on its channel checks, it gathered that local contractors in general had been facing slow payments and billings for selected contracts, particularly those with relatively high exposure to government contracts.
“For the two major rail contracts, LRT 3 and MRT 2, contractors under our coverage had 7%-90% exposure to their outstanding order books as at end-Sept 2018, by our estimates,” it said in a report.
The research firm said LRT 3 contractors would be most impacted though a reprieve could come in the form of the delayed RM800mil to RM1bil payment of claims.
LRT 3 contractors would likely see lower revenue recognition and construction profits in the latest quarter. This is following the prolonged renegotiation of all work package contracts and conversion from the project delivery partner (PDP) scope to turnkey contract.
Contractors had also faced delayed payments for works completed.
As for MRT 2, CIMB Equities Research estimated that earnings impact for contractors involved is likely to be less negative, as the transition from PDP to turnkey model was over a shorter period of time and the cost rationalisation came after the project was more than 30% completed.
“We expect the cost rationalisation impact, which saw the total contract value slashed by 38%, to impact Gamuda Bhd the most, being the turnkey and underground contractor.
“Outstanding revised value of MRT 2 makes up 90% of Gamuda’s outstanding order book, prior to the conversion to the turnkey model,” it said.
The research firm said Gamuda had guided that the balance of works for MRT 2 would likely yield a lower blended pre-tax margin of 5%-7% versus 10%-12% for the completed MRT 1 (Sungai BulohKajang Line).
The research firm said that yearto-date, the overall sector outlook remained subdued.
A negative earnings surprise could potentially weigh on share prices, particularly given the uncertainties around the East Coast Rail Line and the Klang Valley Double Tracking re-tenders.
This week, construction outfit Hock Seng Lee Bhd said it had won an open tender for a contract with Sarawak Energy Bhd for the Balingian coal-fired power plant project in Mukah, Sarawak, worth RM54.3mil.