Construction poser

THE RECENT GENERAL ELECTION and uncertainties in the domestic political scene may have changed the landscape of Malaysian construction companies, for this year at least.

Some brokerage firms are having second thoughts about the construction sector, saying that the shocking performance of the ruling Barisan Nasional coalition has put some lavish mega projects in limbo. Hence, a de-rating of the sector.

Analysts say the situation may have some negative effects on share prices of stocks like Malaysian Resources Corp Bhd, Scomi Group Bhd, Scomi Engineering Bhd and UEM World Bhd.

TA Securities Bhd says concerns may arise on the implementation of projects like the Ipoh-Padang Besar double tracking and Pahang- Selangor interstate water transfer. This may consequently exert selling pressure on share prices of companies like MMC Corp Bhd, Gamuda Bhd and Kumpulan Perangsang Selangor Bhd.

Kenanga Investment Bank Bhd's research unit expects mega projects, especially in states controlled by Opposition parties like Parti Keadilan Rakyat (PKR) in Selangor and the Democratic Action Party (DAP) in Penang, to be reviewed.

`Major projects like the Penang Global City Centre (PGCC), Penang monorail, Penang Outer Ring Road, Langat II water treatment plant and Selangor-Pahang interstate water transfer project would likely slow down in the awarding of contracts and commencement of work,' Kenanga Research says.

Nevertheless, Penang Chief Minister Lim Guan Eng from the DAP has made it clear that the PGCC project was not an issue as no approval had been given in the first place.

Selangor Menteri Besar Tan Sri Abdul Khalid Ibrahim from PKR, meanwhile, has said that the state government would honour contracts signed under the RM9 billion Pahang-Selangor water transfer project.

But it would review the RM2.5 billion contract for the Langat II water treatment plant that would receive raw water from Pahang. Kumpulan Darul Ehsan Bhd was, last January, given the letter of award to build and operate the water treatment plant in Ulu Langat.

Kenanga Research expects more contracts to be awarded on an open tender basis to capable and competent companies or contractors. This should lower contract value and, theoretically, lower government development expenditure.

RHB Research Institute Sdn Bhd has downgraded the sector to `underweight' from `neutral', given the possible structural changes in terms of awards of public contracts into a new one that is more transparent.

`The dismantling of the decades-old public procurement model that was a money spinner for most companies in the past means that construction companies should now trade at lower multiples.

`(The dismantling) theoretically would be good for the sector over the long-term as it promotes competition and efficiency. Unfortunately, over the short-term, this means one key appeal of most Malaysian construction companies, ie, the ability to win direct- negotiated public contracts that fetch fat margins, is now gone,' it says.

Consequently, RHB Research has downgraded its benchmark one-year forward price earnings ratio (PER) for the sector from 15x to 10x. Indicative fair values of industry players have been cut too.

What are the good stocks?

Kenanga Research has suggested that investors focus on construction stocks with significant overseas order books. This means the likes of Muhibbah Engineering Bhd and LCL Corp Bhd.

Analysts at rating agency RAM Holdings Bhd say larger players such as Gamuda have long begun extending their geographical reach to reduce reliance on the domestic market.

Aside from diversifying their earnings base, the current construction and real-estate booms and untapped development prospects of the Gulf countries and emerging economies such as Vietnam and Cambodia also present opportunities to the larger companies with the requisite financial muscle and technical expertise, it adds.

RHB Research likes Zelan Bhd and Sunway Holdings Bhd, expecting them to outperform the market. Zelan, the firm says, deserves a fair value of RM5.69 while Sunway Holdings is targeted at RM1.93.

RHB Research has changed its recommendation on WCT Engineering Bhd and Hock Seng Lee Bhd to `market perform' from `outperform' previously. Its coverage on Prinsiptek Corp Bhd has been halted in view of the market's reduced appetite for construction stocks with small market capitalisation and low share liquidity.

Gamuda and IJM Corp Bhd also are not in the `good' books of RHB Research at the moment. The former's one-year forward PER is now being traded as low as 7x, while IJM's is at 11x from 17x previously.

`During the downcycle in 1999-2000, Gamuda's one-year forward PER was de-rated from a peak of 15x to a low of 7x, while during the 2002-2003 downcycle (that was shallower), it was de-rated from 13x to 9x. So far in the current 2008 downcycle, it has already been de- rated from 25x to 13x,' the firm notes.

For IJM, RHB Research notes that its one-year forward PER was de- rated from a peak of 22x to a low of 11x during the downcycle in 1999-2000, while during the 2002-2003 downcycle, it was de-rated from 17x to 13x. So far in the current 2008 downcycle, it has been de-rated from 17x to 11x.

Overall sectoral performance

Despite the general gloomy feeling, RAM thinks the construction sector should grow further by 5.2% in 2008 with more pace seen in the second half of the year. For 2007, the growth had been anticipated at 4.2%.

`As expected, the construction sector posted a slight recovery in 2007, with an average growth rate of 4.5% for the first three quarters of the year,' the rating firm noted in its credit and sector perspective for 2008 released early this month.

RAM said the performance, which compared favourably against the 0.5% contraction in 2006, was spurred by a gradual pick-up in infrastructure developments under the Ninth Malaysia Plan (9MP).

However, the rating firm said the pace of implementation for the 9MP has been rather slow thus far, with only 30% of the RM200 billion development allocation having been disbursed as at end- October 2007.

`We anticipate the pace of implementation to pick up in 2008,' it added.

Zahir Ramley "Construction poser". Malaysian Business. Apr 1, 2008. FindArticles.com. 08 May. 2008.