Do construction stocks have more legs to run?

KUALA LUMPUR (April 15): The speculation of a possible revival of the put-on-hold East Coast Rail Link (ECRL) has been driving construction stocks since the beginning of the year. But now that the project has gotten the green light, investors may be tempted to take profit.

On March 11, The Edge Financial Daily outlined the stocks that could be potential beneficiaries in the event of an ECRL revival, namely Gabungan AQRS Bhd, IJM Corp Bhd, Lafarge Malaysia Bhd, Econpile Holdings Bhd, Malaysian Resources Corp Bhd, Advancecon Holdings Bhd, Gadang Holdings Bhd, WCT Holdings Bhd and Fajarbaru Builder Group Bhd.

Since then, the counters had seen price gains of between 4.88% and 28.13% as at last Friday.

Year to date, their share prices have rallied between 36.51% and 61.05%. This is in stark contrast to 2018 when they lost between 37.03% and 70.81% of their value.

Affin Hwang Capital analyst Loong Chee Wei said the share price rally in construction stocks had partly reflected the expectation of an ECRL revival. Hence, he expects some consolidation in the near term.

“Some investors may sell on news, so we expect share prices to consolidate for a while because the actual award of contracts may take some time to negotiate,” he said over the phone.

Nonetheless, Malacca Securities Sdn Bhd analyst Kenneth Leong said there could be more upside potential for these construction counters as the ECRL materialisation could drive sentiment in the infrastructure construction industry.

Therefore, he does not foresee significant profit-taking activities in the near term.

“Because there are other catalysts like the Penang LRT (light rail transit) and Pan Island Link 1, both projects’ combined contract value is about RM18.6 billion. Although they are slated to start in June next year, some of their work packages will be tendered out by year-end,” he said.

In a note to investors dated March 13, RHB Research analyst Tay Yow Ken also said the scale of the ECRL — if it was revived — was also expected to add to positive construction industry sentiments.

“Regardless of individual beneficiaries, a revival of the project would provide a significant lift in sentiment for the sector due to its (ECRL) large scale and trickle-down potential,” he noted.

Meanwhile, another bank-backed research analyst also said the rally would be sustainable as market sentiment had turn less pessimistic about the revival of previously suspended projects such as the Kuala Lumpur-Singapore high-speed rail (HSR) and mass rapid transit Line 3 (MRT3).

“It is likely the [construction stock] rally can be sustained, underpinned by developments pertaining to other suspended projects such as the HSR and MRT3. The HSR is bound by the bilateral agreement, and MRT3 is needed because it is a circle line, and it eases transit between multiple MRT lines,” he said, declining to be named.

This article first appeared in The Edge Financial Daily, on April 15, 2019.

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