Tax cuts no impact to construction sector stocks

Construction stocks have outperformed the Colombo bourse’s All Share Price Index, but did not react to the two waves of state tax cuts that followed, a recent presentation by Asia Securities’ said.

Pent-up demand, low interest rates, and higher disposable income in the residential housing segment will drive volume growth over 20 20–2022, said Naveed Majeed, Vice President Research at Asia Securities in his presentation on Asia Securities’ Wealth Insight Series - Construction Sector Investor Event on Thursday in Colombo.

Housing approvals declined on the back of a tight monetary policy implemented from 2016 till 2018. Loan growth saw a sharp fall from 1H 2016 onwards due to high interest rates, Mr. Majeed said.

The current housing loan rates are at similar levels seen back in 2015. So these rates will be a key catalyst to residential demand, Mr. Majeed said noting that interest rate cuts will improve residential demand. “Key catalyst to the residential group will be lower interest rates, higher PAYE threshold and passing of the benefits of the VAT and NBT reductions. We expect a pick up in the residential market in the medium term,” he said.

Higher fiscal deficit in external debt burden will lead to tepid growth of infrastructure projects in the short run but long-term requirements in the sector persist, the presentation showed.

Mr. Majeed said that expressway, highways, roads, bridges and flyovers on average have accounted for 70 per cent of total infrastructure expenditure in the past. He said that infrastructure expenditure was expected to draw 1.4 per cent compound annual growth rate (CAGR) in the next two years.

It was noted that in the projects segment, the oversupply of both apartment and hotel segments will see tepid demand in the medium term. The Port City remains a large opportunity but implementation lags clear visibility. Mr. Majeed said that the oversupply in the apartment segments will drive slow demand for the construction sector. “We expect investors to take a wait-andsee approach till the current supply gets absorbed," he said.

Cement demand will grow mainly on the back of residential demand, he said noting the growth will be more than 5 per cent. The cement capacity market of existing players will see a dilution with 4.5 million metric tonnes (MT) of new capacity being added through 2022, he added. Melsta Gama is to add 900 MT bagging plant in May while Lanwa’s bagging facility is also expected this year.