UOB Kay Hian downgrades construction to ‘market weight’

PETALING JAYA: UOB Kay Hian Malaysia Research has downgraded the construction sector to “market weight” for its lack of growth drivers. The brokerage put its “overweight” call on the building material sector under review.

UOB Kay Hian noted that post the 14th General Election (GE14) that saw Pakatan Harapan (PH) taking over the Federal Government, most construction and highway-concession related stocks have tumbled significantly, besieged by concerns of potential cancellation/deferment of some mega projects, contract renegotiation of ongoing mega projects, and toll road concessionaires being compromised.

For construction and highway-concession related stocks under its coverage, prices have fallen around 20%-44% last week.

“While investors have become overly-bearish and we foresee shares rebounding from historically low valuation levels, we downgrade the construction sector to ‘market weight’ for its lack of growth drivers,” UOB Kay Hian said in its report yesterday.

The brokerage wrote while trough valuations could indicate oversold situation, the sector’s upside was limited by the lack of rerating catalyst.

“Our worst-case valuation scenario suggests that most construction-related stocks are oversold.

However, the new reality also limits the recovery of companies which are dependent on government mega projects,” it explained.

Recall that PH promised to abolish toll collections and review all mega projects in the country.

Last week, a meeting was held between the Council of Elminent Persons and highway operator stakeholders, and former finance minister Tun Daim Zainuddin, who heads the council, is expected to announce a decision on toll charges as early as this week.

“While some mega projects may be cancelled, deferred or renegotiated (East Coast Rail Link (ECRL) bears the highest risk, while HighSpeed Railway (HSR) is rumoured to be also deferred), the market’s misgivings of contract renegotiation for all ongoing mega contracts and expropriation of tolled highways at well below fair valuations are too pessimistic,” UOB Kay Hian said.

“The market is clearly ignoring Prime Minister Tun Dr Mahathir Mohamad’s declaration that the new administration would continue to be friendly to the capital market, and the return of the rule of law,” it added.

Meanwhile, despite its downgrade of the overall construction sector, UOB Kay Hian retained its “buy” calls for certain construction stocks such as Gamuda Bhd, Cahya Mata Sarawak Bhd, Gabungan AQRS Bhd and Protasco Bhd.

Separately, the brokerage values have emerged in its “hold” rated WCT Holdings Bhd, which now trades at 0.4 times net tangible assets after its 44% share price fall last week, and Malaysian Resources Corp Bhd, which could benefit from the Government’s expropriation of tolled expressways.

However, target prices would have to be adjusted down, depending on government decisions, and as the sector lacks major growth drivers, it said.