Posted on 05 Apr 2013
Construction analysts are largely “neutral” on the sector and have advised investors to stay on the sidelines until the risks from the 13th general election (GE13) recede.
In a report, Alliance Research analyst Jeremy Goh downgraded the sector to “neutral” from “overweight”, arguing that the period ahead of the impending polls was “an opportune time to cash out”.
“Although the first quarter of 2013 registered strong job flows, we expect this to taper off in the second quarter, as the caretaker Government cannot award new contracts, and private-sector jobs may take a backseat until the polls are over,” he said.
Goh noted that while contract flows and construction growth had been robust, the uncertainties surrounding the sector have heightened following the dissolution of Parliament on Wednesday.
“There is strong incentive for support buying' to kick in from now until polling, but likely centred on the FTSE Bursa Malaysia KL Composite Index (FBM KLCI)-component stocks. With no index representation, construction stocks could underperform during this period,” he explained.
Alliance Research's top picks include Gamuda Bhd and Kimlun Corp Bhd. “Those weary of election results should look at Eversendai Corp Bhd, which has limited Malaysian exposure,” it said.
The brokerage added that domestic contract awards hit a record RM27.9bil last year, helped mostly by My Rapid Transit (MRT) works, while the first quarter of this year saw job awards worth RM4.4bil.
Despite the sector's resilient fundamentals, Goh believes “it is now tempting to take some money off the table” as the KL Construction Index has outperformed the FBM KLCI by 4.5% year-to-date, adding that the perception of uncertainty alone was enough to dampen stock prices.
Sizeable projects expected to be tendered out this year include the Southern Double Track (RM7bil-RM8bil), West Coast Expressway (WCE) (RM5.6bil), Serendah-Port Klang Track (RM2bil), Kinrara-Damansara Expressway (RM1.5bil), Langat 2 (RM1.2bil), and earthworks for the Tun Razak Exchange (RM1bil) and the Refinery & Petrochemical Integrated Development, or RAPID (RM500mil), Alliance Research said.
“As for the MRT, we gather that the Sungai Buloh-Serdang radial line could be implemented first instead of the KL circle line. The targeted timeline is for initial awards to take place in the second quarter of 2014, and we estimate a total value of more than RM22bil.
“Assuming a status quo Government, the third and fourth quarters should see a pick-up in contract awards. We estimate RM18bil in domestic contract awards under our base-case scenario,” Goh said.
In a note to investors last week, Kenanga Research reiterated its “neutral” call on the construction sector for the second quarter on the back of a likely muted season for contract wins.
“In fact, we noticed that the contract flows have started to slow down in the first quarter. The total RM9.2bil worth of contracts awarded so far in 2013 to listed contractors was actually boosted by the RM6-bil WCE.
“Excluding the WCE, the value totalled only RM3.2bil. Nevertheless, we reckon that earnings for mid-cap construction stocks would gain momentum after the progress of ongoing projects like the LRT extension, power plants, Besraya Extension and the MRT project is sped up after the election,” it opined.
It believes that value would emerge in construction stocks post GE13.
