Slow construction sector expected to pick up in 2H2019

The going will be slow for the construction sector, at least in the first half of 2019, according to research analysts.

Last year, the construction industry took a severe beating, with the KL Construction Index falling almost 50 per cent, following the review of major infrastructure projects post-GE14. Construction counters have declined between 25 and 60 per cent in that period, with most of the stocks currently trading well below their fundamentally assessed trough valuations.

In a note on 7 January, Hong Leong Investment Bank (HLIB) Research expects continued weak sentiments among retail investors in 2019 for the construction, property and building materials sectors, due partly to the US-China trade war, massive national debt, and softer corporate outlook.

According to Kenanga Research, the total contracts secured by listed companies for the 2018 financial year 2018 only amounted to RM18.9 billion, a drastic drop of 48 per cent year on year (y-o-y), following the cost reviews for the LRT3 and MRT2 projects and cancellations of mega infrastructure projects. Contractors are expected focus more on private jobs, such as low-cost housing, high-rise buildings, malls, office redevelopment projects, and private or specialist hospitals in the near term, the report reads.

However, these uncertainties and slowdown is expected to turn for the better in the near future, following greater transparency in the tender processes and possible green light for some on-hold projects, albeit on reduced contract value.

For example, the East Coast Rail Link (ECRL) project, which was terminated in July 2018, could possibly be resumed on a smaller scale if China agrees, according to Prime Minister Tun Mahathir Mohamad.

MIDF Research analyst Muhammad Danial Abd Razak believes that the sector’s long-term outlook will be driven by sustainable measures. “We are encouraged to see that meaningful allocations were secured, giving reasonable attention to residential, non-residential, social amenities and infrastructure developments, says Muhammad Danial, as reported by The Sun Daily.

“Despite the near-term directional swing, we see the headroom is still ample for the sector to grow. This was mainly a recognition of stable development expenditure allocation in Budget 2019, continuation of mega projects such as LRT3, MRT2 and PBH, and pending implementation of infrastructure projects,” he adds.

Despite the cost reductions, the combined contract amount for both MRT2 and LRT3 is still significant at RM41.5 billion, providing earnings visibility beyond calendar year 2020, he notes.

Kenanga Research also expects to see some improvement in jobs secured by the second half of the year, with the re-tendering of the Klang Valley Double Track works, public hospital works, Putrajaya monorail, roll-out of Pan Borneo Sabah, as well as some RM9.1 billion in potential infrastructure spending by the Sarawak government, which is expected to boost the state’s construction outlook.

“We remain positive that after all the kitchen sinking and cost reviews, the sector might see more positive news-flow and competitive tenders amongst contractors going forward as we would expect more tenders to be called under Competency, Accountability and Transparency (CAT) policy, especially on the above-mentioned projects,” the report reads. — Construction+ Online