The construction sector is entering an upcycle, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) observes, with the KL Construction Index (KLCon Index) having climbed to a new high of 25.43-fold.

According to MIDF Research, this is KLCon Index's highest since its lowest price earnings ratio (PER) of 5.8-fold in 2011 alongside with recent lifting of share performance for index heavyweights such as IJM Corporation Bhd (IJM) and Gamuda Bhd (Gamuda).

"The uptick illustrates a conformance to higher macroeconomic activity in the construction sectors such as higher total conventional project awards coupled with the total loans disbursed by financial institutions" it said.

MIDF Research noted that for the period of the first quarter of financial year 2016 (1QFY16) to 4QFY16, the total conventional projects awarded rose aggressively with compound annual growth rate (CAGR) of 68.3 per cent driven by segments of residential, infrastructure and new projects awarded.

"Currently, we are experiencing its positive impact derived from the surge in construction loans disbursed" the research arm observed.

"For example, in January 2017 RM7.4 billion loans disbursed was the highest since January 2014 (RM7.4 billion) combined with the aggressive rate of total conventional projects awarded hence the uptrend in KLCon Index.”

MIDF Research highlighted that the construction sector is receiving constant loan disbursement rate for FY16 amounting to RM67.42 billion, combined with 11,875 projects, as opposed to December 2015 amounting to RM65.13 billion on the back of 11,583 projects.

The research arm observed that liquidity underpins the surge for residential, non-residential (buildings), infrastructure conventional construction segments and healthy construction trend in states such as Penang, Sabah, Sarawak, Selangor and Federal Territory.

"As a result, the valuation of KLCon Index i.e. price-to-earnings (p/e) and price-to-book (p/b) ratios travelled further than expected" it said.

Nonetheless, MIDF Research maintained its positive stance on the construction sector with Muhibbah Engineering (M) Bhd (Muhibbah) and Malaysian Resources Corporation Bhd (MRCB) as its top picks.

"We reckon that the current higher risk-taking mode sweeping the market should be tracked closely and recommends taking long/short position of construction companies regardless of market capitalisation based on the balance of parity between p/b and p/e ratio for KLCon Index" it said.

This article was extracted from Borneo Post. To read the full article, kindly click here