Stimulus package not enough to propel construction sector
Research house maintains ‘underweight’ call amid muted prospects for 2020
PETALING JAYA: A potential stimulus package to counter the potential drag on the economy from the prolonged coronavirus epidemic is not expected to propel the construction sector that is seen to have muted prospects in 2020.
“We maintain our underweight recommendation for the construction sector. We expect muted prospects for the sector in 2020 as it continues to retreat from a super-cycle fuelled by debt-funded public infrastructure projects spanning over 10 years from 2008 to 2018, which turned out to be unsustainable,” AmResearch said in a sector report yesterday.
The research house said its view is confirmed by the surprise 25-basis-point cut in the overnight policy rate by Bank Negara Malaysia last month.
“While the government may introduce a stimulus package to counter the potential drag on the economy from the prolonged coronavirus epidemic, we believe the focus will be on small-scale shovel-ready projects such as roads, pavements, bridges, schools and public amenities that will benefit mainly the smallish and unlisted construction outfits.”
In 2020, as far as spending on public infrastructure projects is concerned, it believes the government’s focus will be on completing ongoing projects at a reduced cost and/or over an extended construction period to help ease strains on the government’s cash flow. These include the East Coast Rail Link, MRT2, LRT3 and the Pan Borneo Highway, Sarawak.
“Given the still elevated national debt and its commitment towards fiscal prudence, we sense great reluctance and hesitation from the government to revive projects which have been put on hold, or embark on new projects, with the exception of the Johor Baru-Singapore Rapid Transit System (JB-Singapore RTS) and Sarawak-Sabah Link Road.”
AmResearch said it is more inclined to see the revival of the JB-Singapore RTS project as an isolated case, but noted that it should not be regarded as a telltale sign that the government is going all out to start new projects.
“Firstly, we believe a revised estimated price tag of RM3.16 billion as compared with RM4.93 billion initially, is more palatable to the costconscious government. Secondly, Malaysia may be liable to a hefty abortive cost to be paid to Singapore if the project is delayed further or terminated.”
The research house believes valuations of construction stocks are lofty with a weighted average forward price-to-earnings ratio of 18.9 times on a weighted earnings per share growth rate of only 2.1% in FY20.
“We may upgrade our underweight call on the sector to neutral or overweight if the government decides to pumpprime the economy with public projects in the event of external shocks such as an unexpected slump in the global economy.”
Meanwhile, MIDF Research said there is now a higher likelihood for the People’s Bank of China to take a more accommodative monetary stance in order to provide a backstop to the impending economic fallout from the coronavirus epidemic.
“Hence we would not be surprised to see more meaningful cuts in the key loan prime rate going forward. In addition, depending on the severity of the virus outbreak, other regional central banks may also react in tandem,” MIDF said.
Looking further forward into the second half of this year, it reckoned the additional financial liquidity would continue to propel the regional equity markets higher with the local benchmark FBM KLCI scaling towards its 2020 baseline target.
“At this juncture, pending further insights over the coronavirus epidemic, we reiterate our year-end 2020 baseline target for the FBM KLCI at 1,680 points.”