Higher risk premium weighs on construction stocks
Market concerned about change in MRT3 model and impending GE
PETALING JAYA: The higher risk premium brought along by the “build and finance” model and the impending general election is weighing on the share price of construction stocks.
AmInvestment Bank Research, although maintaining an “overweight” stance on such stocks, believe that these factors contributed to the risk premium.
It added in a report that the slight de-rating of these stocks was mainly triggered by the decision of MRT Corp to carry out the mass rapid transit 3 (MRT3) project via the “build and finance” model by a turnkey contractor.
MRT Corp used the project delivery partner model for the MRT1 and MRT2 projects.
The new model gives an upper hand to foreign contractors with strong financial backing from their governments, such as the Chinese and Japanese.
After the announcement, share prices of key players Gamuda Bhd and IJM Corp Bhd fell as much as 5.9% and 7.5% to RM4.77 (one-year low) and RM2.97 (two-year low) respectively.
“Not helping either is investors’ increased cautiousness towards construction stocks ahead of the 14th general election, as construction stocks are generally perceived to be vulnerable to policy changes,” the research house said.
The “build-and-finance” model has been used before in the country, with the RM4.5bil Second Penang Bridge and the RM1.3bil PahangSelangor Raw Water Transfer Tunnel project developed using the same model.
More recently, it was reported that the Exim Bank of China will provide a 20-year soft loan for 85% of the project cost of the RM55bil East Coast Rail Link, currently being undertaken by China Communications Construction Co.
“MMC-Gamuda, who has effectively been the main contractor for the MRT1 and MRT2 projects, would now have to settle for a lesser role.
“Similarly, first-line subcontractors to MMC-Gamuda in the MRT1 and MRT2 projects – such as IJM, Sunway Construction Bhd and WCT Holdings Bhd – will see themselves dropping by at least one rank in the food chain too,” it said.
The research house noted that when a contractor moved down the level of subcontracting, the value and margins for the contract also dropped correspondingly.
“This could be negative for the local construction industry as a whole,” it said.
However, while seemingly negative, the research house does not believe the latest developments warrant a downgrade to the sector.
It noted that the sector’s earnings prospects remained strong, with most players sitting on record orderbooks and with several other mega infrastructure projects coming up.
Its top buys for the sector are Gamuda for expertise in tunnelling and resilient property profits, Sunway Construction for involvement in key mega projects and recurring internal jobs, Kimlun Corp Bhd for the supply of concrete segments to rail projects and attractive valuations, as well as Protasco Bhd for recurring incomes from road maintenance concessions and its attractive dividend yield.