Construction job flows to pick up in 2nd half but shrink for full year

PETALING JAYA: Construction job flows is expected to pick up in the second half of 2017 (2H), but a downward normalisation in jobs is also projected in 2017 to RM25 billion, from an all-time high base of RM56 billion in 2016, according to HLIB Research.

“We expect the flow of contract awards to pick up in 2H, aided by the rollout of LRT3 (RM9 billion). Channel checks with contractors reveal that several tenders have been called and are undergoing evaluation,” the research house said in a report.

It added that normalisation is setting in and given the significantly higher base for 2016 at RM56 billion, it expects a downward normalisation in 2017 to RM25 billion.

“With 1H numbers forming 43% of our full-year target and expectations of a stronger 2H, we reckon this target is on track. Despite the downward normalisation expected in 2017, this remains at the higher end of the historical range from 2009-2015 of RM10 billion-RM28 billion,” said HLIB.

However, it reckoned that job flows could pick up strongly next year fuelled by the impending rollout of mega rail projects such as the East Coast Rail Line (RM55 billion), High Speed Rail (RM60 billion) and MRT3 (RM50 billion).

Domestic contract awards to listed contractors in Q2’17 amounted to RM4.1 billion, a 49% drop year-on-year. Sizeable job wins were lacking during the quarter with only one contract exceeding RM500 million (Bintulu Port supply base wharf). In comparison, contract awards in Q1’17 (RM6.6 billion) and Q4’16 (RM6.8 billion) were boosted by several MRT2 viaduct packages.

On a cumulative basis, 1H17 domestic contract awards totalled RM10.7 billion, declining 72% year-on-year. The steep fall was attributed to an exceptionally high base last year due to the award of the MRT2 underground works (RM15.5 billion), DUKE3 (RM3.7 billion) and Sarawak Pan Borneo Highway packages (RM3.2 billion).

Foreign contract flows in Q2’17 stood at RM631 million, a 20% decline year-on-year, bringing the 1H sum to RM1.1 billion (+3% y-o-y).

It said risks to the industry include soft domestic property market, leading to slower private sector contracts, but maintained its overweight call on construction.

“We expect a strong revival in job flows next year, driven by the several mega rail projects. The significance of these mega rail projects to the construction sector should not be underestimated. To illustrate, job wins hit a high of RM28 billion in 2012 and RM56 billion in 2016 when the MRT1 and MRT2 were rolled out,” said HLIB.

Gamuda Bhd is the research house’s top large cap construction pick as it is set to see earnings hit multi-year highs in FY18 and FY19.

For small caps, it likes George Kent (M) Bhd and Pesona Metro Holdings Bhd as they both offer superior earnings growth and strong return on equities.