Subscribe:

Pages

Tuesday, 17 January 2017

(The Edge) Healthy project pipeline ahead for construction

Construction sector
Maintain overweight:
According to Construction Industry Development Board statistics, industry contract awards fell 28% quarter-on-quarter (q-o-q) to RM22.9 billion in the third quarter of 2016 (3Q16) due to fewer property-related construction projects in the current weak market conditions (-40% q-o-q to RM10.2 billion).

Infrastructure contract awards moderated (-6% q-o-q to RM11.4 billion) after peaking at a 13-year high of RM23.9 billion in 1Q16. Contract awards eased 1% year-on-year (y-o-y) to RM97.3 billion in the first nine months of 2016 as the surge in infrastructure projects off set the lower value of property-related projects.

The award of major work packages for mass rapid transit Line 2 worth over RM26 billion and the RM16.5 billion Pan Borneo Highway (PBH) Sarawak spurred infrastructure contract awards in 2017. We estimate RM96 billion worth of new and ongoing infrastructure contracts to be awarded in 2017 to 2018.

We excluded the Kuala Lumur to Singapore high-speed rail that is scheduled to conduct civil works tenders by end-2017, given the uncertainty over total cost and timing. Major work package awards for the RM9 billion light rail transit Line 3 are expected in the first half of 2017.

After three maiden contract awards in 4Q16, the remaining 32 packages for the RM12.8 billion PBH Sabah civil works should be awarded this year. The RM55 billion East Coast Rail Line is expected to take off in 4Q17.

It is positive to note that aggregate construction sector net profit was flat y-o-y in 3Q16 after contracting for the last two quarters. Aggregate sector earnings grew 17% q-o-q in 3Q16, driven by better performance of heavyweights Gamuda Bhd and IJM Corp Bhd. We expect better earnings in 4Q16, driven by higher construction progress billings for new contracts and foreign exchange gains from overseas projects for Eversendai Corp Bhd and WCT Holdings Bhd. We remain “overweight” on the construction sector as news flow on contract awards should sustain sector outperformance in 2017. The rebound in sector core earnings per share (EPS) growth to 15% y-o-y in 2017E (estimate) from a 1% y-o-y contraction in 2016E is another positive catalyst. We see better value among small- and mid-cap names such as Sunway Construction Group Bhd, WCT and Gabungan AQRS Bhd. For large-cap exposure, we prefer Gamuda over IJM Corp, based on Gamuda’s lower price-earnings ratio and higher core EPS growth in 2017E. Key risks are project execution risks and rising costs. — Affin Hwang Capital, Jan 16