KUALA LUMPUR (July 5): CGS-CIMB Research and Hong Leong Investment Bank (HLIB) Research maintained their "neutral" stance on the construction sector following the two-week enhanced movement control order (EMCO) in Selangor and the Federal Territory of Kuala Lumpur.
In a note today, CGS-CIMB maintained its "neutral" rating of the sector despite risks arising from the EMCO and the full movement control order (FMCO), but said it is keeping an eye on laggards with potentially stronger recovery angles in the fourth quarter of this year (4Q21).
"The share prices of contractors under our coverage have fallen by 10% on average, with the big caps led by Gamuda Bhd (-21%). Gamuda remains the biggest laggard and the potential reactivation of the MRT 3 (the Mass Rapid Transit 3 at RM22 billion-RM30 billion, with the company likely to undertake turnkey and tunnelling packages) is the main share price catalyst. For the small-cap space, HSS Engineers Bhd’s share price (-12.2% year-to-date [YTD]) is attractive ahead of a revival in engineering consultancy-related contracts," it said.
The report followed a stop-work order by the Ministry of Works for all construction sites in affected areas in Selangor and the Federal Territory of Kuala Lumpur for the EMCO period from July 3 to 16. Only critical maintenance and repair works are allowed.
The research house said expectations of a recovery in the second half of 2021 (2H21) are now dampened by the imposition of the FMCO and EMCO, which would mean further delays in ongoing construction works. It maintained its earnings per share (EPS) and target price (TP) forecasts as it believes the construction sector will remain cautious as political uncertainties and earnings risks emerge from the lockdown.
"Upside risks are election-driven contract roll-outs post the lifting of the political emergency. Downside risks: A prolonged EMCO and further delays in job roll-outs." it said.
CGS-CIMB also highlighted that the two-week work suspension would have a milder impact on contractors' earnings in comparison to last year's 30-day nationwide stop-work order.
Meanwhile, HLIB Research said domestic contracts awarded in 2021 so far totalled RM4 billion (-18% quarter-on-quarter [q-o-q]; +260% year-on-year [y-o-y]), but decreased in tandem with the imposition of strict Covid-19 restrictions in 1H21, featuring stronger contributions from water and affordable housing jobs.
"On the whole, we maintain our 'neutral' weight on the sector despite rosy headline development expenditure numbers under Budget 2021 due to execution risks and possible redirection of allocation. We remain cautious about the weak earnings fundamentals, unpredictable political landscape and stiffer competition for jobs. Contractors with bigger balance sheets are better positioned for PFI (private finance initiative)-driven projects given the constrained fiscal space," it said.
HLIB Research favours Sunway Construction Group Bhd (SunCon), with a TP of RM1.87, due to its strong balance sheet, extensive track record of infrastructure projects and strong support from its parent company, combined with the ability for the company to secure overseas contracts.
The research house slashed its financial year 2021 (FY21)/FY22 aggregate sector earnings forecasts by 12.7%/9.7% respectively due to the enforcement of Phase 1 of the FMCO in June, and reduced its recovery expectations for the sector in line with the National Recovery Plan. The downgraded earnings forecasts are attributed to slower site progress, margin markdowns and delays in new job contributions.
On the other hand, RHB Research maintained its "overweight" rating of the construction sector.
It highlighted that downside risks to the sector are uncontained Covid-19 infections among workers as contractors are under stricter business restrictions to reduce cases. The research house stated that infections among workers can be controlled with persistent testing to allow for a sustained recovery of the sector.
"Construction companies are likely to report sluggish earnings for 2Q21 and 3Q21 on narrower operating margins and weak progress billings (due to reduced capacity). In a scenario where construction activities have ground to a complete halt for a whole month, our back-of-envelope calculation indicates that this may impact full-year earnings by 22%-35%."
The research house's top picks are Gamuda and SunCon, which are behind the MRT 3 construction project, with TPs of RM3.86 and RM1.94 respectively. The two companies also have tenders submitted overseas, which reduces the concentration risk in Malaysia. Tender outcomes, expected between 2H21 and early 2022, may serve as positive share price catalysts.
Downside risks are longer-than-expected delays in progress, failure to secure new orders, as well as further delays in execution and inefficient progress in the immunisation rate.