Friday 29 Mar 2024
By
main news image

KUALA LUMPUR (March 13): There may be less infrastructure spending in 2020, as the government could reduce development expenditure to mitigate the impact of lower oil revenue.

In a construction sector update today, Affin Hwang Capital Research said the sharp fall in Brent oil prices may reduce the government’s revenue from oil-related sources. It bears noting that oil-related revenue accounts for 30.8% of total revenue. Therefore, the government may reduce development infrastructure to mitigate the impacts of the decline in revenue via less infrastructure spending.

As such, new large scale infrastructure projects could be deferred, it said.

The research house is cutting earnings forecasts for the construction companies that it covers to reflect lower assumptions of new contract wins and weaker property sales.

It said core sector earnings per share (EPS) is expected to grow 2% year-on-year (y-o-y) and contract 5% in 2021.

“The loss of toll highway earnings for Gamuda Bhd contributes to the sector EPS decline in 2021E (assumes the disposal of its toll highway concessions at end-FY20). Our sector 2020E core EPS growth was 13% y-o-y in early-2020 and 8% y-o-y before this round of earnings cuts. Our sector 2021E core EPS growth was 4% y-o-y before this round of earnings cuts,” the research house noted.

Affin Hwang Capital added that it was also cutting the target prices (TPs) for the majority of the construction stocks it covers to reflect lower revised net asset value (RNAV) and used higher discounts to RNAV to derive TPs for some stocks.

In the past four to five years, the construction sector's average share price discounts to RNAV were in the range of 8% to 47%. The share price discounts to RNAV were at the highest in 2015, which saw concerns over political and federal government deficit issues surrounding 1Malaysia Development Bhd (1MDB), and 2018, when the 14th General Election (GE14) occurred.

“Given the 'perfect storm' concerns currently, we believe wider discounts to RNAV are warranted to derive our target prices for some stocks that historically traded at wider discounts such as IJM, MRCB and WCT,” the research house said.

That said, Affin Hwang Capital noted that there are indications of policy continuity, as newly appointed Works Minister Datuk Seri Fadillah Yusof said construction of the Pan Borneo Highway will continue through the use of a conventional project approach following the Pakatan Harapan’s termination of the Project Delivery Partner model.

However, it remains uncertain if the minister will review other policies and re-prioritise projects that are to be implemented, which could lead to contract award delays.

“We stay 'underweight' the sector. We downgrade IJM Corp Bhd to a 'sell' from 'hold' with a reduced TP of RM1.58, based on a wider 30% discount to our lowered RNAV. We cut our core EPS forecasts by 16% in FY21-22E to reflect lower CPO price assumptions and lower new construction contract wins. We downgrade Gabungan AQRS Bhd to 'hold' from 'buy' with a lower TP of RM1.10, based on the same 20% discount to reduced RNAV. Sector top 'buys' are Sunway Construction Group Bhd, AME Elite Consortium Bhd and Taliworks Corp Bhd,” the research house stated.

      Print
      Text Size
      Share