Highlight/Repeat Edge Weekly says slowdown in construction contract flow & cooling property mart could trim stock picks

by **Cals** Wed 07 May 2014, 01:38

Highlight/Repeat Edge Weekly says slowdown in construction contract flow & cooling property mart could trim stock picks

Business & Markets 2014

Written by Surin Murugiah of theedgemalaysia.com

Tuesday, 06 May 2014 17:28

KUALA LUMPUR (May 3): The Edge Weekly, in its latest edition has raised the spectre of a slowdown in construction contract flow and a cooling property market that may have an adverse impact on shares of these companies and questions if it was time for investors to take their money off the table.

The Edge Weekly in its cover story said that the RM200 billion worth of jobs in the pipeline for the next 20 years had been carrots for investors and driven up valuations.

However, as the government nears the end of its fiscal rope and the property market slows down, investors will have to reassess the potential risk of delays in these mega projects, it said.

It said that although the short and mid-term fundamentals of most of the construction players are still intact and they have sizeable order books to keep them busy until the end of next year, the problem is that many of the mega-projects in the pipeline would not be awarded anytime soon.

Citing Gadang Holdings Bhd major shareholder and managing director Tan Sri Kok Onn, the Edge said that the only major projects that will go ahead this year were those of Petronas in the form of RAPID and RAPID Phase 2.

It said the RM60 billion RAPID (Refinery and Petrochemical Integrated Development) project that falls under the Pengerang Integrated Petroleum Complex recently received the final investment decision from Petroliam Nasional Bhd and Kok expects several of its packages to be awarded in the next six months, including the co-generation power plant and the infrastructure jobs that Gadang was bidding for.

However, the bulk of the RAPID project’s cost will go to the oil and gas players and equipment suppliers with only a small slice for civil and infrastructure works.

Thus, some economists are expecting the construction sector to grow at a slower pace than the consensus forecast of 10% this year, it said.

The weekly said infrastructure projects accounted for 20.4% of new construction contracts in 2013, down from an average of 31.4% from 2007 to 2013.

Looking ahead, no tenders will be awarded for the massive RM25 billion second Klang Valley Mass Rapid Transit line soon, although the Cabinet approved the project last month, it added.

The weekly noted that project manager MRT Corp has said tenders for the rail project will only be called next year after the public display, environmental impact assessment, land acquisitions and fine-tuning of the alignment have been completed.

It is highly unlikely that a project this size and with high multiplier value will be scrapped, but a lengthy delay could be costly. Players like Gamuda Bhd and MMC Corp Bhd have invested heavily in 10 tunnel-boring machines for Line One.

The equipment makes the MMC-Gamuda partnership a strong contender for the next tunnelling package, but it could mean expensive holding costs if there is no timely deployment of the machines, say industry observers.

Following the government’s cooling measures, the residential property market is expected to see a slowdown. And given that 30% of new contracts came from residential projects last year, any weakening will have a substantial impact on the sector.

The weekly also quoted RHB Research Institute’s chief economist Lim Chee Sing as saying that potential homebuyers were also facing hurdles in securing bank financing with loan rejection rates potentially as high as 30% based on recent reports.

As a result, there could be a delay in the rolling- out of several mega property developments planned in the Klang Valley because these are highly dependent on market demand to get off the ground, it said.

The RM50 billion development by the EPF’s wholly-owned Kwasa Land Sdn Bhd on the Rubber Research Institute of Malaysia’s (RRIM) 2,330 acres in the heart of the Klang Valley could be the largest to be affected, noted the weekly.

However, despite the slowdown in the near term, longer-term support for the industry remains intact, said the weekly.

“Looking ahead, the fundamental drivers remain supportive of the construction sector amid continued fiscal consolidation. Progress in existing projects in the transport, utility, highway, power plant and oil and gas sectors as well as housing development projects should ensure the sector expands at a healthy pace,” it quoted CIMB Research’s chief economist Lee Heng Guie as saying.

The weekly in its analysis pointed out that the KL Construction Index had climbed 20% in the past 12 months after construction stocks found with investors again following the general election in May last year.

It said the rise was much higher than the FBM KLCI’s gain of 9% over the same period, indicating strong interest in the sector amid expectation of a steady stream of contracts, which would boost their order books.

“So, will the rally go on?” asked the weekly.

Despite several analysts expressing bullish views on the sector, the weekly explained that not all was rosy for construction stocks when one looked beyond the long list of construction jobs in the pipeline.

As the rally in property and oil and gas stocks appears to have lost steam this year, some say investors may turn to the construction sector because of its attractive fundamentals, it said.

For more details on the construction and property sector outlook, read the Edge Weekly (May 5 – May 11 issue).