Rosier Outlook for Construction?
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Market observers believe the local construction sector is in better position this year as more contracts will be awarded mainly for infrastructure and property projects.
They said construction companies would still be given contracts to build mainly for infrastructure and property projects, thus providing better earnings visibility.
Analysts, however, cautioned that construction companies must be prepared to face unforeseen circumstances involving the fluctuation in building materials cost and stringent regulation recruitment of foreign labour as well as weather conditions at construction sites.
Inter-Pacific Research head of research Pong Teng Siew said construction companies need to be efficient in undertaking construction projects and be able to anticipate additional cost and hiccups.
“Difficulties such weather, labour and building materials costs can cause delays and expenses might rise,” he told NST Business.
Bina Puri Holdings Bhd and its joint-venture with Tim Sekata Sdn Bhd are among those which had secured major contracts recently. They won a RM251.53 million sub-contract from Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd.
The project is for the electrified double track project from Gemas to Johor Bahru, which is expected to be completed by April 30, 2020.
Pong said construction companies also need to be aware of the stipulated time to execute the construction project, while replenishing their orderbook in order to top up the contracts work.
“Construction companies are usually unable to report a steady source of revenue and profits as their margins might be squeezed and difficult to manage if they do not execute the project properly. Hence, experience and good track records count a lot,” he said.
Bina Puri group executive director Datuk Matthew Tee said the group’s unbuilt book order stands at RM1.145 billion with the latest award.
“We anticipate this year to be a challenging year for the construction and property sectors and hopes that the roll out of projects as announced in the budget can be expedited,” he said.
In an exchange filing to Bursa Malaysia recently, Bina Puri said the scope of works included earthworks for track diversion, building platform and track embankment, ground treatment, surcharging, sand blanket, sub-ballast, retaining structure, trackside drainage, track culvert and river protection.
Affin Hwang construction analyst Loong Chee Wei said construction companies need to build up their orderbook to generate earnings visibility.
“The margins depend on the project execution – how well they manage the project. Usually they get lower margin if they absorb additional rise in labour and materials cost if they don’t execute it well,” he said.
Maybank IB Research construction analyst Adrian Wong said potentially lower margins and smaller orderbook replenishment for the second consecutive year will bring interest back onto earnings delivery, especially from 2020.
“Sector valuation remains fair, balancing the risk-reward. The value of new job awards is expected to continue to moderate after the good years in 2016-2017 as a result of the reprioritisation of major infrastructure projects,” he said in a report.
Wong said the 2019 Budget was scarce of any announcement of new major projects, making contractors’ orderbook replenishment opportunities will hinge on on-going projects.
The projects include the Pan Borneo Sabah, Gemas-Johor Bahru double tracking rail and Central Spine Road.
“Orderbook wildcard could come from the Penang Transport Master Plan (PTMP), Klang Valley Double Track (Phase 2), Johor-SG Rapid Transit System Link and potential revival of the East Coast Rail Link,” he added.
Wong said the cancellation of major infra projects, replaced by the pool of new projects to be put up for tender, was expected to be significantly reduced.
“We expect the values of contracts to be awarded to also be smaller in comparison to those awarded in the recent years. This could be supported by awards from the Pan Borneo Sabah, Gemas-Johor Bahru double tracking rail and Central Spine Road for their remaining packages,” he said.
With the contractors now vying for a smaller pool of contracts, he expects lower construction margins.
“Profit margins up to six per cent are likely to be the new norm from up to 10 per cent, previously. We believe contractors with higher orderbook to cover ratios are likely to have more resilient margins over this period of fiscal consolidation.