KUCHING: Tapering liquidity in the construction sector could indicate a weak financial year ended 2018 (FYE18), analysts say.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), the construction sector loan illustrates a lethargic rate for October 2017 of RM5.58 billion registering only 1.3 per cent month on month (m-o-m) growth compared to September 2017 of RM5.51 billion.
MIDF Research noted that the liquidity flow is weaker compared to the October 2016 of RM6.10 billion, down 8.5 per cent year on year (y-o-y).
“At first instance, despite the headlines of big ticket projects such as East Coast Railway, KL-Singapore High Speed Railway and LRT3 liquidity for the construction projects appears muted,” the research arm said.
“However, till October 2017 construction loans disbursed amounted to RM63.25 billion whereas the preceding period of 10-months FY16 recorded a RM56.11 billion documenting a whetted growth of 12.7 per cent y-o-y.
“By comparing 10-months FY16 total construction loans disbursed to 10-months FY15 of RM53.85 billion – growth seems continuous albeit at slower pace of 4.19 per cent y-o-y.”
MIDF Research noted that repetitive trends from August-FY16 to October 2016 where construction loans in disbursed hovered between the ranges of RM5.5 billion to RM6.1 billion are emerging in August 2017 to October 2017 where the amount fluttered between the ranges of RM6.5 billion to RM5.5 billion.
The research arm believed that the liquidity trend may at first glance turn up muted but comparatively it is the seasonal year-end factor.
“Thus, upcoming months may repeat the optimism for risk taking reflecting a potential 3.5 per cent y-o-y increase from the total loans disbursed in FY16 of RM67.41 billion.”
MIDF Research highlighted that as a result of the fallow liquidity period, the construction sector earnings expectation is tapering – correlating to the lethargic liquidity level.
Whilst the consensus are expecting construction sector’s 21.7-fold price earnings ratio (PER) to exceed the FBM KLCI price earnings ratio (PER) of 16.76-fold, the research arm believed the upside may lie in FYE18 instead of the fourth quarter of FYE17 (4QFYE17).
MIDF Research excluded figures for July-2008 as it skewed the research arm’s observation as the figures for price earnings (p/e) and price to book (p/b) ratio reflected the significant drop in sectoral earnings, causing p/e and p/b ratios to reach 1619.2-fold and 164.4-fold respectively.
“This is due to the weak results of big-caps construction companies (BC3) which in the 3QFY17,” it said.
“Most of the BC3 earnings lack the charm of the small-cap construction construction companies (SC3) citing slower progress billings.
“Although, BC3 may appear to have sturdier orderbook but SC3’s smaller project scale has shorter project duration.”
MIDF Research noted that on hindsight, despite the aggressive news headlines of big ticket projects, operating margins for the construction sector have not improved.
The research arm further noted that for 3QFY17 construction sector, the operating margin is decreased to 10.33 per cent, down 9.1 per cent y-o-y.
MIDF Research related this to the weak performance of BC3’s operating margin i.e. IJM Corporation Bhd, Gamuda Bhd and WCT Holdings Bhd with the exception of Cahya Mata Sarawak Bhd (CMS) for 3QFY17.
“However, companies such as Gabungan AQRS Bhd (Gabungan AQRS) bucked the trend by maintaining strong operating margin with a consistent growth in working capital,” it said.
Although Muhibbah Engineering (M) Bhd’s (Muhibbah) operating margin was compressed to 7.7 per cent, MIDF Research could dispel the negative undertone by looking at the contribution of the group’s concession assets in Cambodia.
It pointed out that the three airports; Siem Reap, Sihanoukville and Phnom Penh contributes on average 30.24 per cent of profit before tax (PBT) for the past two years.
Supported by growth in tourist arrivals to Cambodia, the research arm reckoned that any earnings blips from Favelle Favco Bhd’s insipid performance would be balanced out by PBT contribution from the concession.
Overall, MIDF Research maintained its positive stance on the sector premised on the available liquidity to the sector.
The research arm also introduced CMS, Muhibbah and Gabungan AQRS as top picks for FYE18.