By NG MIN SHEN
The construction sector lacks catalysts in view of the reduced infrastructure spending by the government following major cost cuts in the Light Rail Transit Line 3 (LRT3) and Mass Rapid Transit Line 2 (MRT2) projects.
“However, the recent heavy sell-down on the sector presents a good opportunity to buy on weakness/bottom-fish selectively, given that the Kuala Lumpur Construction Index (KLCON Index) is currently trading at a new low of seven times price-earnings ratio, at 10-year -3 standard deviation (-3SD) level, a level that is even lower compared to the low during the 2008 financial crisis,” Kenanga Investment Bank Bhd (Kenanga IB) noted.
The investment bank advocates investors adopt a selective stock picking strategy on stocks that face minimal earnings risk in the near to medium term like Gamuda Bhd and Kerjaya Prospek Group Bhd.
It said the KLCON Index is down 50% year-to-date compared to a 7.5% gain seen at the FTSE Bursa Malaysia KLCI, weighed down by weak market sentiment, termination of infrastructure contracts and lack of catalysts.
Kenanga IB added that leading contractors like Gamuda are vying for smaller building jobs priced around RM300 million to RM500 million, which signals such companies are competing against smaller local contractors, while targeting overseas markets that have massive underground infrastructure works like Taiwan and Singapore.
“This indicates a major slowdown in local infrastructure projects,” the research firm opined.
Should more big-cap contractors compete in the smaller-size space going forward, consolidation in the sector could take place as smaller contractors with limited resources struggle for survival.
The total value of contracts secured by listed companies in 2018 fell 48% year-on-year (YoY) to RM18.9 billion following the conclusion of the cost review for the LRT3 and MRT2 projects.
“We believe contractors would be vying for more private jobs — ie low-cost housing, high-rise buildings, malls, office redevelopment projects and private/specialist hospitals in the near term. Hence, we believe contracts secured by listed companies would be similar if not higher.
“In the event that contracts secured are lower than 2018, we see minimal downside risks to KLCON’s valuation from here as it is already now trading at 10-year -3SD level, and we do not expect more negative newsflow like cancellations of mega projects,” Kenanga IB said.
Its top construction pick is WCT Holdings Bhd for its ability to constantly win jobs under the current challenging environment and its weak share price performance, although its high gearing of one time remains a concern.