KUALA LUMPUR (June 13): The Malaysian construction sector is expected to sustain its healthy momentum, with the roll-out of big-ticket projects.
In a statement, RAM Ratings said it maintained a positive outlook on the sector, underpinned by the sturdy pace of deal flows and construction activity.
“On the heels of robust project awards in 2014, the value of construction work completed surpassed RM100 billion for a second consecutive year in 2015, clocking in at RM115 billion,” the statement read.
“Overall, growth in construction activity still hovered around 12%. This year, awards for rail-related jobs and road-related jobs have been ramped up, such as the Klang Valley Mass Rapid Transit (MRT) Line 2 and the Pan Borneo Highway in Sarawak, for which the announced job parcels to date have exceeded RM25 billion in total,” it added.
RAM Ratings said at an 8.2% clip in 2015, the construction sector remained the fastest-growing segment of the domestic economy.
It said as the pick-up in the pace of infrastructure work is expected to mitigate the softer property segment, construction firms should thus be able to sustain healthy revenue visibility.
“Most of the large listed ones currently have order books that cover at least 1.7 times their construction top lines. That said, project concentration for construction firms is expected to stay high,” it added.
The ratings agency said for the first quarter of 2016, gross domestic product (GDP) growth for the construction sector expanded at 7.9%, but is expected to moderate slightly to 7.1% for the full year, on the back of increased likelihood that jobs deemed less crucial to the economy, may experience slower implementation, as well as the more subdued property market.
The firm said with operating margins hovering at about 12% (on average for listed firms), construction firms still enjoy decent profitability, but job execution will become more crucial to maintain margins, especially since the industry will face a slew of cost pressures this year, such as heftier foreign worker levies and the surge in steel bar prices.
Also, the leverage for these firms has been rising as a whole, with total borrowings for these construction companies (per RAM’s classification) cumulatively having risen by about 20% to RM23 billion as at end-December 2015, and the average gross gearing ratio having increased up to 0.66 times (from below 0.6 times 2 years ago), which may stretch the balance sheets of some firms.
“All said, the credit trends of all RAM-rated construction firms have remained stable. We expect that the business performance of rated firms will stay supported by resilient deal flows,” it added.
However, RAM Ratings said the cashflows of companies that are more reliant on constant order-book replenishment — with project completion within a typically shorter period — will be more susceptible to delays in deal awards and execution.
“In addition, we will be keeping an eye for companies with increasing debts for potential strain in their financial profiles,” the statement read.