News Room - Business/Economics

Posted on 11 Sep 2008

Contractors to see improved second half as material costs fall

The performance of leading contractors will likely improve in the second half of the year, due to declines in prices for oil and construction materials, say several brokerage houses.

Large contractors like Italian-Thai Development, Ch Karnchang and Sino-Thai Engineering were picked by several brokerages as potential stocks.

A Kim Eng Securities (Thailand) analyst yesterday said prices for oil, steel and other construction materials in the second half had already declined 20 per cent from the first half. Therefore, the gross profit margin of the leading contractors will improve from the first half.

The analyst said Ital-Thai was likely to gain the most, because the company has its own construction-material factories for cement and structural-steel components. The broker expects the company's gross profit margin to recover to 7 per cent in the second half - from 4.7 per cent in the first half - with a full-year margin of 6 per cent.

Ital-Thai posted a second-quarter loss of Bt372 million from its joint venture for the Nam Theun 2 hydroelectric-dam project in Laos. As a result, the company's gross profit margin in the quarter dropped to 2.3 per cent, from 6.9 per cent in the first three months.

Meanwhile, the analyst said the declining prices for oil and construction materials would benefit Sino-Thai significantly next year after low-margin construction projects like the Airport Rail Link and the new government centre on Chaeng Wattana Road

were completed.

"Kim Eng forecasts a gross profit margin of 3.2 per cent for Sino-Thai this year, but that percentage is expected to improve to more than 4 per cent next year," the analyst said.

Meanwhile, an Ayudhya Securities analyst said the declining prices would benefit Sino-Thai the most, because its entire revenue comes from construction. The brokerage expects a gross profit margin of 3.45 per cent for the company in the second half, up from 3.13 per cent in the first. That figure is forecast to rise to 4.75 per cent next year.

As for Ital-Thai, the analyst said it would benefit fully in the fourth quarter from the declining prices.

As well, the company's third-quarter operating results should be better than in the second quarter, because it already booked a cost overrun for the Nam Theun 2 dam in the latter period.

The brokerage expects Ital-Thai's gross profit margin to be 7 per cent in the second half and 6 per cent for the full year.

The Siam City Research Institute said besides declining prices for oil and construction materials, a high gross profit margin of 10 to 15 per cent for the Nam Ngum 2 dam in Laos would boost Ch Karnchang's gross profit margin to 9.72 per cent, up from 8.48 per cent last year.

Revenue from the Nam Ngum 2 dam will account for 37 per cent of the full-year target of Bt13.8 billion.

Ch Karnchang plans to propose Bt6.9 billion worth of bidding documents in the second half for projects with gross profit margins of 10 to 15 per cent. This will be another key factor in boosting the company's gross margin.