Finding value in post-GE14 construction bloodbath

This article first appeared in The Edge Malaysia Weekly, on May 21, 2018 - May 27, 2018.
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AS the markets reopened last week after the stunning outcome of the 14th general election on May 9, construction stocks took a heavy beating.

Last Monday, the first trading day after the polls, the Kuala Lumpur Construction Index plunged 12.9% to 244.78 points — its sharpest single-day fall since March 10, 2008 (it dropped 15.77% that day).

By Thursday, the index had sunk further to 237.25 points. In contrast, the benchmark FBM KLCI had inched marginally higher after a see-saw week to 1,854.44 points at the day’s close, compared with its pre-election close of 1,846.51 points.

Of the 69 construction stocks reviewed by The Edge based on Bloomberg data, 34 had headed south between May 14 and 17.

Among them, the worst hit by the post-election selldown was George Kent (M) Bhd, which plummeted spectacularly from RM3.94 on May 8 to RM1.56 last Thursday — a 60.4% drop in four trading days.

George Kent, a water meter manufacturer that has managed to win bids for rail projects, is perceived to be closely linked to the previous government.

The selldown in the sector was driven by concerns about the new government’s intention to review infrastructure projects that have been made known to the public.

“Construction stocks generally were trading at a premium earlier this year due to the anticipation of more contract wins,” Areca Capital Sdn Bhd CEO Danny Wong Teck Meng tells The Edge.

The signals from the new government that it will tighten the purse strings have caused some jitters over the general policy and fiscal outlook. Less public spending could translate into less infrastructure development.

Prime Minister Tun Dr Mahathir Mohamad has pledged to review a number of mega infrastructure projects if the Pakatan Harapan coalition he led wins.

“One of the ways [to rein in spending] is to defer some infrastructure projects or proceed on a staggered basis. So, this may affect some ongoing and future projects,” says Wong.

Those expected to be in the spotlight include the East Coast Rail Line (ECRL), the Kuala Lumpur-Singapore high-speed rail (HSR) project and the third mass rapid transit line.

Among the major construction counters that came under selling pressure last week were those tipped to be front runners in winning work packages from these mega projects. These include Gamuda Bhd and Malaysian Resources Corp Bhd (MRCB), whose joint venture was selected as one of two project delivery partners (PDPs) for the HSR project last month.

Others include YTL Corp (down 24.06% over four days up to May 17) — whose tie-up with a Lembaga Tabung Haji unit is the other HSR PDP — and IJM Corp, which is seen to have a good chance of snagging key work packages from the ECRL project.

Wong says it may be too soon to judge the overall picture concerning the government’s fiscal outlook as the election has just been concluded.

“I do not see panic sell-offs in the broader market, [but] foreign investors may prefer to unload now and wait on the sidelines,” he says. “People are waiting for more news.”


Volatility may continue

While last week’s selling pressure has unearthed some value in the construction sector, it is unclear if the worst is over, he says, adding that he is also looking for bargains in the construction sector.

That means it is still risky to enter the market from a trading play perspective as the volatility may continue for some time.

That said, Hong Leong Investment Bank issued a note last week pointing out that the selldown on George Kent could have been overdone. It said the company’s net cash per share was 82 sen, which makes up of about 54% of its share price. Its order book stood at RM5.6 billion as at March 31.

Wong says a safer approach for investors eyeing potential bargains with a long-term perspective is to disregard the sentiment. Instead, it may pay to look at fundamentals and earnings visibility from contracts and jobs in hand.

“Some construction stocks have been sold down to below their intrinsic value and they look very attractive, considering their contracts in hand. These are the ones to watch out for when the dust settles,” he adds.

With that in mind, construction counters that historically pay good dividends could be interesting yield plays if their share prices have been bogged down.

Protasco Bhd, for example, retreated 10% over four days up to last Thursday. That pushed its historical dividend yield to 7.57%.

Another local analyst suggests sidestepping the post-election fallout by filtering out political factors and mega project plays.

“Look for contractors with strong execution track records and that do not depend so much on political connections to secure jobs,” says the analyst.

With this in mind, one Pakatan Harapan pre-election pledge that could affect the construction sector’s prospects is that the coalition will tackle the issue of monopolies, says Wong. “So, that could mean it is worth looking past the usual construction names and check out the second liners.”

Another notable pledge is that Pakatan Harapan will gradually abolish toll concessionaires and renegotiate existing concession terms, notes the analyst. “If this happens, it is expected to hit companies holding toll concessions.”

Among the listed companies with toll concessions are IJM Corp Bhd, which wholly owns the New Pantai Expressway, Besraya and Lekas highway concessions.

IJM also has a 26.18% stake in the upcoming West Coast Expressway, which is being driven by listed WCE Holdings Bhd.

MRCB is another construction player that had a highway concession. Its Eastern Dispersal Link highway was handed back to the federal government as the group said the concession ended on Dec 31 last year.

However, MRCB was in the midst of discussing a mutual termination agreement and settlement sum before the election.

Wong says the realignment of federal and state governments may also signal better fortunes ahead for some construction counters.

One example is the long-standing water impasse in Selangor, which was a federal opposition-controlled state before the Pakatan Harapan victory.

“Now that the federal and state governments are aligned, there could be more focus on reviewing piping issues and so on,” says Wong. “So, some piping construction players could benefit.”

In fact, companies that have been involved in water treatment in Selangor have bucked the trend last week. For instance, Salcon Bhd had climbed 11% after the polls until last Thursday and Engtex Bhd, about 18%. YLI Holdings Bhd, however, has been moving sideways.



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