Posted on 09 Mar 2015
MIDF Research remains positive on the construction sector due to better earnings outlook, robust contracts award and limited valuation downside on construction stocks.
"The robustness of the sector may propel construction companies' earnings growth prospect further and which in turn shall translate into higher market valuation. Hence we remain positive on the construction sector," it said in its research report last Friday.
Out of the seven construction stocks that MIDF covers, the earnings of Gamuda, IJM Corp, Muhibbah Engineering and Protasco were in line with its expectations while WCT Holdings and Hock Seng Lee posted lower than expected net profit due to particularly poor construction margins.
Meanwhile, Eversendai posted earnings above its expectation due to improvement in the execution of local construction projects.
"Overall, we opine that competitive tender awards particularly on those big government-linked projects have squeezed the operating margin of construction companies. It must be highlighted that had these construction players failed to tighten its cost control on contract executions, it would have dragged its margins even further," said MIDF.
However, earnings outlook of construction companies may be more promising for the first quarter of 2015, as lower raw materials prices could lower operation costs and help margins to improve.
MIDF expects the average FY15 EPS for the construction stocks under its coverage to grow by 23% year-on-year and believes that the earnings estimates will remain stable at prevailing levels on expectation of better construction job replenishments and improvement in construction work progress.
In addition, the consensus earnings estimates of construction companies have not been subjected to material downward revisions so far this year due to the government's reaffirmation to implement projects under Budget 2015.
"We note the improvement in the pace of contract awards for the first two months of this year. Total value of contracts awarded to listed construction companies so far came in at RM3.5 billion compared with RM1.4 billion in the first quarter of 2014. Of which, foreign contracts contributed 14% or RM497 million of the total.
"Although we could see flattish growth in new property sales this year following the more stringent bank's lending criteria coupled with the potential interest hike in the second half of 2015, we expect more commercial buildings, infrastructure works and on-going mega projects (for example KL MRT, RAPID project) will continue to support the sector's growth going forward," it said.
