Healthier outlook seen for construction industry
The Malaysian construction industry is poised for improved earnings in the second half of 2022, given the gradual return of foreign workers and the recent easing in base metal prices.
Kenanga Research, which is reiterating an “overweight” call on the sector, believes the worst is over.
“Since the end of June, certain key building material prices, such as steel and aluminium, have come off substantially due to the intermittent lockdowns in China. So are diesel and bitumen on the back of weaker oil prices.
“Meanwhile, most new contracts being negotiated would have priced in the current market prices (which are higher) and have an element of price variation built in, to protect the contractor’s margins in the event of huge swing in material prices.”
Kenanga Research believes that overall margins should gradually improve, as the low-margin old jobs tail off and the new projects adjusted for higher input costs start to contribute.
Separately, the research house said construction counters under its coverage saw marginal deterioration in the second quarter of this year.
“Gamuda Bhd was the only company that beat stronger-than-expected property and construction margins.
“While on the disappointing end we have WCT Holdings Bhd, which saw a weak contribution from its property unit as it struggled to cover overhead costs.”
Additionally, Kenanga Research said Kerjaya Prospek Group Bhd was affected by slower billings on labour shortages.
Kenanga Research said the margins realised by most contractors in the first half of 2022 were still below the pre-covid levels, due to the soaring costs of building materials, particularly steel and labour shortages that hampered work progress.
“Gamuda is the exception, which saw construction margins stronger than pre-covid levels due to cost savings recognition from its MRT2 project, which is coming to an end.”
Amid a slow job market, year-to-date, Kenanga Research said IJM Corp Bhd and WCT have yet to secure any new work packages.
“Similarly, Kimlun Corp Bhd and Sunway Construction Group Bhd are trailing their replenishment targets.
“Consequently, orderbook levels of most players are depleting. However, we foresee better job replenishment prospects with the imminent rollout of MRT3 and Pan Borneo Highway (Phase 2).”
As multinational companies diversify their manufacturing bases geographically (away from China) to de-risk, it said there are opportunities in the construction of new semiconductor plants and data centres locally.