Affin Hwang Capital expects weaker 2Q20 construction earnings on full brunt of MCO

Affin Hwang Capital expects weaker 2Q20 construction earnings on full brunt of MCO
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KUALA LUMPUR (July 6): Affin Hwang Capital Research expects core earnings for the construction sector to worsen for the second quarter of 2020 (2Q20) as it bore the full brunt of the impact of the government’s movement control order (MCO) as construction sites were only allowed to restart work in early May.

In a note today, it said the requirement for all foreign workers to be tested for Covid-19 before being allowed to work at the sites delayed the resumption of construction operations.

“The disruption to supply chains from building materials to equipment supplies also contributed to the delay. Hence, we expect most construction companies to report weaker results for 2Q20.

“Out of the 10 construction companies that we cover, [the results of] 60% were below our expectations, 10% within our expectations and 30% above our expectations.

“Aggregate construction sector earnings contracted 41% year-on-year (y-o-y) but grew 4% quarter-on-quarter for 1Q20. IJM Corp Bhd recognised net exceptional losses of RM95 million and unrealised foreign exchange losses of RM91 million for 1Q20 (fourth quarter of financial year 2020 for IJM Corp), which dragged down sector earnings,” it said.

The research house also predicted a slow earnings recovery for the sector and lowered most of its earnings forecasts following the 1Q20 results.

“At the start of the year, we projected a sector core earnings per share (EPS) growth of 13% y-o-y for 2020, recovering from an earnings contraction over the previous two years.

“Following the earnings cuts, we now expect sector core EPS to contract by 24% y-o-y for 2020, for the third year in a row, before recovering to a growth of 3% y-o-y for 2021,” said Affin Hwang.

The research house added that the sector core price-earnings ratio of 21 times estimated for 2020 is not attractive considering the slow earnings recovery.

Hence, Affin Hwang reiterated its ‘underweight’ call for the construction sector and said that Sunway Construction Group Bhd (SunCon), AME Elite Consortium Bhd and Taliworks Corp Bhd were its top "buys" as it believed that they were relatively more able to weather the downturn of the sector.

“Key upside risks are a faster-than-expected recovery in progress billings for ongoing construction projects and a revival of mega infrastructure projects such as the Klang Valley MRT (Mass Rapid Transit) Line 3 and Kuala Lumpur-Singapore high-speed rail,” it noted.