Time to accumulate construction stocks?

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DISAPPOINTING earnings in the quarter ended June 30 resulted in rather heavy profit-taking in construction stocks, which had risen substantially in the first half of the year.

Analysts see the share price weakness as a buying opportunity for those who had missed the boat earlier amid expectations that the construction sector would be a beneficiary of the upcoming Budget 2015, to be tabled in Parliament this Friday.

Besides, they point out, most of the construction companies have healthy order books that would sustain them over the next two years.

The selling of construction stocks has dragged Bursa Malaysia’s Construction Index down over the past month. It had slid to a four-month low of 299.89 points last Thursday from a peak of 313.12 points in August.

“It is not surprising that investors are selling as most of the stocks under our coverage have good order books, although they posted lower net profits,” says an analyst, adding that this is not a concern. “The financial progress of construction is lagging behind. The lower revenue and earnings were mainly due to less project recognition during the quarter.”

Gamuda Bhd, for example, saw the net profit of its construction segment drop 36.1% year on year to RM32.9 million in its fourth quarter ended July 31 (4QFY2014) while revenue plunged 65.7% to RM361 million due to the large recognition boost last year from the electrified double track project.

Other construction players attributed their lower net profit to less billings, foreign exchange losses, smaller operating profit because of higher operating costs and an increase in material costs, among others.

“Now that the shares of the construction companies have come down, it may be a good time to get back into the industry, which is expected to benefit from upcoming projects,” says the analyst, adding that the sector remains robust with several more contracts to be awarded next year. “We still have an ‘outperform’ rating on the sector as there are projects in the pipeline.”

The construction stocks that saw a sell-off include WCT Holdings Bhd, IJM Corp Bhd and Hock Seng Lee Bhd.

Investor disappointment stemmed from high expectations of improved earnings, given the strong order books of the companies. WCT, for example, has an order book of about RM3.1 billion, IJM some RM5 billion and Hock Seng Lee RM1.1 billion.

Yet, WCT’s net profit dropped to RM34.3 million in 2QFY2014 ended June 30 from RM56.7 million in the previous corresponding quarter. Revenue fell to RM401 million from RM482.5 million.

The stock declined 7% or 16 sen to RM2.16 last Thursday from RM2.32 on Aug 6.

IJM lost 3.5% or 23 sen from RM6.65 on Aug 19 to close at RM6.42 last Thursday. Its net profit shrank to RM133.4 million in 1QFY2015 ended June 30 from RM164.3 million previously. Revenue was stagnant at RM1.4 billion.

Hock Seng Lee closed at RM1.85 last Thursday, down 7% from RM1.99 on Aug 21. It posted a lower net profit of RM18.9 million in 2QFY2014 ended June 30 compared with RM22.6 million previously. Revenue was RM140 million.

Despite the sector’s recent poorer earnings, RHB Research’s Joshua Ng is positive on its outlook and maintains his “overweight” recommendation. “While the quarterly numbers of IJM Corp, Kimlun Corp Bhd, Protasco Bhd and Hock Seng Lee fell short on an annualised basis, we expect them to report stronger quarters ahead.”

He adds that the sector will not lose its momentum and expects the current strong activities to continue and drive medium-term earnings growth.

Work in progress …future mega projects, such as the Klang Valley MRT 2, bode well for the construction sector

The construction industry’s bright prospects have, in fact, attracted new players with an eye on future mega projects, such as the Klang Valley MRT 2, West Coast Expressway, Kuantan Port expansion, RAPID projects, monorail extension from KL Sentral to Bandar Sunway and the Gemas-Johor double track railway.

Two weeks ago, Sunway Bhd announced its plan to list its construction arm, Sunway Construction Group Bhd, in the second quarter of 2015.

The proposal does not come as a surprise because the construction sector is now in the spotlight, thanks to increasing infrastructure work in the Klang Valley. At the same time, the property sector is taking a breather, post cooling measures effected by the government.

Moving forward, CIMB Research’s Sharizan Rosely advises investors to accumulate potential beneficiaries of Budget 2015. He points out that this time, the total allocation for construction and infrastructure is likely to be higher than Budget 2014’s RM8.8 billion.

“The allocation for basic infrastructure projects should be more relevant to medium-sized contractors such as Malaysian Resources Corp Bhd, Puncak Niaga Holdings Bhd, Ahmad Zaki Resources Bhd, Salcon Bhd and the pipe players. The likely greater emphasis on MRT 2 should be positive for Gamuda.”

He adds that although the new budget’s theme would be more relevant to the smaller players, “our expectation of a 54% average growth in the order books of contractors we cover remains intact as it is also driven by private sector contracts”.

This article first appeared in The Edge Malaysia Weekly, on October 06 - 12, 2014.