Covid-19 clusters weigh on construction index

9 of its top 10 counters by market capitalisation have seen their share prices extend their fall since January


MALAYSIA’S ongoing struggle to contain the Covid-19 outbreak at construction sites has seen the majority of stocks on the local construction index trading lower since the start of the year as rising cases weighed on investor sentiment.

The Bursa Malaysia Construction Index shed 17.18 points or 9.5% year-to-date (YTD) to close at 164.09 last Friday, wiping out RM3.15 billion from its constituents.

Over the past year, the index has declined by 48.68 points or 22.9% from a 52-week high of 212.77.

Nine of its top 10 counters by market capitalisation have seen their share prices extend their fall since January, with the exception of Jaks Resources Bhd, which has kept its share price unchanged at 68 sen.

Top counter Gamuda Bhd, which holds a 28% weightage on the index, saw its share price decline by 35 sen or 9.4% YTD at last Friday’s close of RM3.38.

Over a 12-month period, however, Gamuda’s share price has dropped by 75 sen or 18.2% from a 52-week high of RM4.13, wiping out RM1.67 billion from its market valuation.

Other top YTD decliners were IJM Corp Bhd, Sunway Construction Group Bhd (SunCon), Kerjaya Prospek Group Bhd, Ekovest Bhd, WCT Holdings Bhd and Econpile Holdings Bhd.

Gainers were few comprised of MGB Bhd, which saw its share price climb by 23 sen or 37.7% to 84 sen last Friday from 61 sen on Jan 4, DKLS Industries Bhd (up by one sen or 0.66% YTD to RM1.52), Pimpinan Ehsan Bhd (up 25 sen or 35.7% to 95 sen) and Melati Ehsan Holdings Bhd (up three sen or 24% to 53 sen).

Works Minister Datuk Seri Fadillah Yusof recently called for construction companies to step up their efforts in providing workers’ housing in accordance with the Workers’ Minimum Standards of Housing and Amenities Act 1990 (Act 446).

In a statement on Saturday, Fadillah said the majority of contractors did not pay much attention to living quarters on building sites given its temporary nature.

Data gathered by news portal Malaysiakini showed a total of 71 construction clusters reported so far with 16,222 positive cases confirmed as of Feb 6. This accounted for 6.8% of the country’s 238,721 confirmed cases at the time of writing.

Out of the 71 clusters identified, 51 were still active with the Damanlela construction site cluster registering the highest number of cases at 2,776. This is followed by the Puteh Lama construction site in Lembah Pantai with 2,283 cases and the Muda construction site in Kepong with 2,177 cases.

The Damanlela construction cluster is linked to the Pavilion Damansara Heights (PDH) project situated at Jalan Damanlela, Kuala Lumpur. WCT was appointed as the main contractor for Phase 1 of the project in September 2018 for a total contract sum of RM1.8 billion and Phase 2 in March 2020 for a total contract sum of RM1.2 billion.

In November last year, WCT announced that construction work would stop at its Jalan Damanlela site after 15 cases were confirmed at the onset.

According to WCT, initial positive cases were identified upon undertaking proactive and preventive Covid-19 testing which found cases among their staff, subcontractors, foreign workers and consultants.

Hong Leong Investment Bank Bhd (HLIB Research) analyst Jeremy Goh subsequently revised WCT’s earnings in a research note, slashing it by over 4% due to the construction site closure.

“We cut WCT’s financial year 2020 (FY20) until FY22 earnings by 4.4%, 1.5% and 1.2% as we adjust downwards construction progress and margins, as well as adjusting for the impact of Conditional Movement Control Order (CMCO) on its hospitality assets,” Goh said.

The research house maintained its ‘Hold’ call on WCT with an unchanged target price of 44 sen, saying that the stock trades at a fair price/book value ratio of 0.19 time which should limit downside risks, However, it said the price is reflective of WCT’s less than sanguine prospects and fragile balance sheet.

“Outstanding contract value for PDH Phase 1 and Phase 2 constitute approximately 30% and 22% of WCT’s outstanding order book. Estimated Phase 1 revenue contribution is 4% and 12% of total group revenue in FY19 and 1H20,” it said.

It further anticipated lower productivity levels post-resumption due to possible challenges in labour remobilisation.

WCT’s share price had steadily risen from a low 36 sen on Nov 3 to 56 sen on Dec 17 last year. However, its shares have declined seven sen or 13.7% since the start of the year from 51 sen on Jan 4 to close at 44 sen last Friday.

Apart from outbreak concerns, the recovery of select counters are also expected to be dragged by the extension of the second MCO (MCO 2.0) and the current spike in steel prices.

In a recent research note on SunCon, Goh expects the company’s recovery to be bumpy as productivity levels are at circa 50% after a week of MCO 2.0.

“We believe substandard productivity levels are largely from its building jobs given extra housing arrangements needed on the part of their business partners compounded by scaled-down operations,” he said in the note.

Goh further noted that local steel prices have increased by roughly 30% versus the 2020 average of RM2,600 to about RM2,700 currently.

Assuming steel prices hover at current levels for the remainder of 2021, HLIB Research estimates this to represent a 0.6% contraction in SunCon’s construction gross profit margin translating into its FY21 earnings with a downside of around 7%.