KUALA LUMPUR (April 20): Local construction companies are in a better financial position to weather the current cyclical downturn compared during the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC) period.
Affin Hwang Capital said based on data, it estimated aggregate construction sector net gearing was 0.59x in 2019, higher than 0.52x in 2008 (GFC) but lower than 1.26x in 1997 (AFC) levels while sector interest cover was a comfortable 4.2x in 2019, the same level as 2008 but higher than 2.8x in 1997.
"We remain cautious on the sector given the weak earnings visibility due to the movement control order (MCO) impact and order book replenishment concerns," it said in a note today.
However, sector net gearing is below the historical average, while interest coverage and quick ratios are at comfortable levels and remained underweight on the construction sector.
Affin Hwang Capital said construction activities have been brought to a near standstill for a month since March 18 when the government's MCO began.
The MCO has been extended to April 28 but some approved projects will be allowed to resume operations on a case-by-case basis.
"Most listed contractors have applied to resume works on their construction projects. But we gather that the companies under our coverage have not received the government’s decision on the resumption of works. This is despite the extended MCO period starting on April 15 and ending on April 28.
"There is a risk that the MCO period could be extended further if cases of COVID-19 infection remains high. Hence, the contractors continue to pursue the approval to resume works to reduce the risk of delays in the completion of projects," said Affin Hwang Capital.
It added that the MCO will impact construction and property development progress billings, traffic volume for toll highway concessions and property sales as show galleries are closed.
"Even when the MCO is lifted, we expect a slow recovery as strict work and travel restrictions will likely to remain, to prevent COVID-19 infection. We have assumed aggregate revenue for our universe of construction companies to contract 4.0 per cent year-on-year in 2020 and 5.0 per cent year-on-year in 2021.
"As a result, we expect sector core net profit to contract 9.0 per cent year-on-year in 2020 and 1.0 per cent year-on-year in 2021," said Affin Hwang Capital.
It added that some infrastructure projects are likely to resume works namely the Klang Valley MRT Line 2 (MRT2), LRT Line 3 (LRT3), East Coast Rail Link and Pan Borneo Highway.
"These projects have Centralised Labour Quarters near the project sites and construction works along the road or railway alignments will generally mean most workers practice social distancing," said Affin Hwang Capital.
Stay calm. Stay at home. Keep updated on the latest news at www.EdgeProp.my #stayathome #flattenthecurve
TOP PICKS BY EDGEPROP
Seri Baiduri Apartment, Taman Bukit Indah
Seasons Luxury Apartments @ Amara Larkin
Johor Bahru, Johor