KUCHING: The construction sector’s fundamental is still on solid ground, however, the big caps are becoming less appealing due to their potential earnings risk underpinned by huge exposure to the property sector.
According to Kenanga Investment Bank Bhd’s research arm (Kenanga Research), the KL Construction Index has slipped into negative territory registering negative returns of 6.2 per cent, dragged down by the larger caps due to the recent foreign sell-offs.
However, it still outperforms the FBMKLCI which registered negative returns of 8.3 per cent.
Overall, MITRA is still the top performer among all contractors in our universe with a gain of 57.7 per cent, thanks to the group’s growing orderbook and higher earnings base.
It is followed by MUHIBAH, which advanced 7.5 per cent, backed by its strong orderbook replenishments and earnings contribution from associates.
Meanwhile, NAIM continued to be the top loser in the research house’s construction space, dragged down by disappointing earnings and significant exposure in property development, and we may consider ceasing coverage on NAIM should they perform poorly again in the upcoming quarter
“Out of 10 contractors under our coverage, five registered results that were within expectations, one above, while the remaining four came in below expectations. We deem the second quarter calendar year 2015 (2QCY15) set of results as weak as there were more disappointments compared to 1QCY15 despite lesser coverage,” said Kenanga Research.
To recap, Kenanga Research ceased coverage on BENALEC in 1QCY15 due to constant disappointments in earnings coupled with bleak earnings outlook.
“Following our earnings review in 2QCY15, we are still expecting a healthy earnings growth of 20.6 per cent and 11.5 per cent for FY15-16E on average for contractors under our coverage underpinned by healthy outstanding orderbook that will last for another two to three years except for HSL,” it added.
In the upcoming Budget 2016, Kenanga Research expects mega rail projects to be emphasized even though the PDP role has been awarded to GAMUDA-MMC and MRCB-GKENT joint-ventures.
That aside, there are also talks that there is potential for Gemas-JB Electrified Double Tracking Railway to be revived which the research house will be expecting in the upcoming Budget.
“Aside from rail projects, we believe that Budget 2016 will continue to emphasise on highway projects like Pan Borneo Highway, Sungai Besi Ulu Kelang Expressway (SUKE), and Damansara-Shah Alam Highway (DASH).
“As such, we do not believe there would be much surprise from the upcoming Budget 2016, and we believe that the contractors are fairly priced in for now.
“We expect the sector to continue to be driven by infrastructure projects over building projects underpinned by MRT2, LRT3, RAPID, Pan Borneo Highway, SUKE, and DASH. Given the sheer size of these jobs, we will be expecting most of the contractors in town to benefit from these contracts whereby most awards are expected to be dished out in mid-2016.”
Despite the disappointments in earnings from several contractors in 2QCY15, the research house are hopeful for the earnings delivery in 3QCY15 to be better and expect most of the contractors to register satisfactory results underpinned by strong outstanding orderbook.