KUALA LUMPUR, Malaysia (July 5): Following the two-week enhanced movement control order (EMCO) in Selangor and the Federal Territory of Kuala Lumpur, CGS-CIMB Research and Hong Leong Investment Bank (HLIB) Research maintained their “neutral” stance on the construction sector. Despite the dangers posed by the EMCO and the full movement control order (FMCO), CGS-CIMB maintained its “neutral” rating of the sector in a note released today, saying it is keeping a watch on laggards with possibly better recovery angles in the fourth quarter of this year (4Q21).
“Contractors under our coverage have seen their share prices decrease by 10% on average, with Gamuda Bhd leading the way (-21 percent ). The main share price trigger is the prospective reactivation of the MRT 3 (the Mass Rapid Transit 3 is valued at RM22 billion to RM30 billion, with the business expected to undertake turnkey and tunnelling packages). HSS Engineers Bhd’s share price (-12.2 percent year-to-date [YTD]) is favorable in the small-cap category ahead of a rebound in engineering consultancy-related firms “It stated, “tracts.”
The claim came after the Ministry of Works issued a stop-work order for all building sites in impacted districts of Selangor and the Federal Territory of Kuala Lumpur from July 3 to 16. Only essential maintenance and repairs are permitted.
The enforcement of the FMCO and EMCO, which would mean further delays in ongoing construction projects, has reduced expectations of a rebound in the second half of 2021 (2H21), according to the research house. It kept its earnings per share (EPS) and target price (TP) predictions because it expects the construction industry to remain cautious as political concerns and earnings risks arise from the shutdown.
“Election-driven contract rollouts after the political emergency is lifted pose a risk. Downside risks include a protracted EMCO and additional work roll-out delays “It was stated.
In compared to last year’s 30-day worldwide stop-work order, the two-week work suspension will have a less impact on contractors’ revenues, according to CGS-CIMB.
Domestic contracts awarded in 2021 so far totaled RM4 billion (-18 percent quarter-on-quarter [q-o-q]; +260 percent year-on-year [y-o-y]), according to HLIB Research, but declined in tandem with the implementation of strict Covid-19 restrictions in 1H21, with stronger contributions from water and affordable housing jobs.
“Despite the bright headline development expenditure numbers in Budget 2021, we maintain our ‘neutral’ weight on the sector due to execution concerns and likely allocation redirection. We remain cautious due to weak profit fundamentals, an uncertain political scenario, and increased employment rivalry. Given the limited fiscal space, contractors with larger balance sheets are better positioned for PFI (private finance initiative)-driven projects “It was stated.
Sunway Construction Group Bhd (SunCon), with a TP of RM1.87, is favored by HLIB Research due to its excellent balance sheet, lengthy track record of infrastructure projects, strong support from its parent business, and capacity to secure global contracts.
Due to the implementation of Phase 1 of the FMCO in June, the research firm lowered its aggregate sector earnings forecasts for fiscal years 2021 (FY21) and 2022 (FY22) by 12.7 percent and 9.7 percent, respectively, and lowered its recovery expectations for the sector in line with the National Recovery Plan. Slower site progress, margin markdowns, and delays in new employment contributions are all blamed for the decreased earnings predictions.
RHB Research, on the other hand, kept its “overweight” rating for the construction industry.
Uncontained Covid-19 infections among workers are one of the sector’s downside risks, according to the report, since contractors are subjected to harsher business limitations in order to reduce cases. Infections among workers may be controlled with ongoing testing, according to the study firm, allowing for a long-term recovery of the industry.
“Construction companies are expected to report slow results in the second and third quarters of this year due to narrower operating margins and lower progress billings (due to reduced capacity). Our back-of-the-envelope assessment shows that if building operations come to a total standstill for a month, full-year earnings could be affected by 22 percent “t -35 percent t -35 percent t -35 percent t -35
Gamuda and SunCon, the companies leading the MRT 3 construction project, are the research house’s top recommendations, with TPs of RM3.86 and RM1.94, respectively. Tenders have also been lodged by the two firms outside of Malaysia, reducing the possibility of concentration in Malaysia. Tender results, which are expected in the second half of 2021 and early 2022, may act as favorable share price drivers.
Longer-than-expected delays in development, failure to win new orders, as well as further delays in execution and inefficient vaccination rate progress, are all potential downside risks./n
