Construction conundrum
JUST when the construction index on the local stock market had been on a declining trend, new contract announcements related to rail projects reversed that trend.
On Thursday, over RM4bil worth of contracts were announced by Prasarana Malaysia Bhd, related to the construction of the Light Rail Transit Line 3 (LRT3). This boosted the construction index yesterday, reversing a declining trend. To be sure, the construction index had been on an upward trend most of the year, only to slow down more recently.
With billions of ringgit worth of contracts announced and billions more to come for the construction sector, the question that needs to be asked is, will all of this translate into stellar profits at the listed construction companies winning these awards?
In the past, investors have often been taken up by news of massive contract wins by construction companies. But if you track the earnings growth of the large construction companies, they do not show any significant spikes in profits that one would have expected following the massive wins. This is partly because many of the large players have a significantly high cost base, which means that they constantly need new big contracts to feed that workforce. Furthermore, they also embark on outsourcing some of the work.
Also, nobody can really put a finger on what the margins of contractors are because nobody knows the actual cost they have incurred in securing projects.
In some extreme instances, there isn’t any logical indication as to why contractors fail to deliver profits that commensurate with the size of their contract wins. In the case of LRT3, though, research analysts have given a good indication of the profit margins that the winning contractors will be able to secure.
Some small contractors are already showing stellar profits from the projects they are embarking on. If they consistently deliver good profits, and better still are able to hand out attractive dividends to shareholders, then maybe this stigma on construction firms will change.
But not many are able to do that.