Construction sector’s outperformance sustainable

Construction sector

Maintain overweight call: We remain “overweight” on the construction sector as news flows on contract awards should sustain the sector’s outperformance.

Aggregate sector core net profit fell 14% year-on-year (y-o-y) and 7% quarter-on-quarter (q-o-q) in the second quarter of 2016 (2Q16) as newly secured projects did not contribute significantly to bottom lines.

Construction companies saw strong new infrastructure contract procurement in the first eight months of 2016 (8M16). We expect this to spur a strong sector core earnings growth of 15% y-o-y in 2017 as most companies have record-high order books.

Our top market and sector buys are WCT Holdings Bhd, Sunway Construction Group Bhd, Gamuda Bhd and Gabungan AQRS Bhd.

According to Construction Industry Development Board statistics, revised construction contract awards rebounded 7% y-o-y and 19% q-o-q to RM39.3 billion in 1Q16. Contract awards fell 40% y-o-y and 56% q-o-q to RM17.2 billion in 2Q16, but we believe this was due to reporting delays as new contract awards were high, according to news reports.

All the work packages for the Pan-Borneo Highway (Sarawak section), Sungai Besi-Ulu Klang Elevated Expressway and Damansara-Shah Alam Elevated Expressway have been awarded.

Most of the major work packages for mass rapid transit Line 2 (MRT2) have also been awarded. Based on news reports, we estimate that about RM50 billion of construction contracts were awarded in 8M16.

We expect the value of contract awards to ease in 4Q16 as most of the large-scale infrastructure projects have been launched. The remaining packages for the RM32 billion MRT2 and RM6 billion West Coast Expressway should be rolled out over the next six to 12 months.

New projects expected in 4Q16 are the RM9 billion light rail transit Line 3 and RM13 billion Pan Borneo Highway (Sabah stretch), and most of the contract awards should flow through into 2017.

Aggregate construction sector net profit contracted 44% y-o-y in 2Q16 as Eversendai Corp Bhd, IJM Corp Bhd and WCT were hit by unrealised foreign-exchange losses, and Eversendai incurred an RM102 million impairment loss.

Core net profit fell 14% y-o-y in 2Q16 as ongoing projects for most construction companies are at the tail end, while new contracts have not contributed significantly to earnings yet. The property arm of some of the companies, such as IJM Corp, saw lower earnings due to weaker sales and higher operating costs. — Affin Hwang Capital, Sept 9

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This article first appeared in The Edge Financial Daily, on Sept 13, 2016. Subscribe to The Edge Financial Daily here.