Positive for construction sector after MRT3 project restart

The sector’s GDP grew by 6.8% YoY in 4Q21 and the construction activities level has reached the pre-pandemic level 

By NURUL SUHAIDI / Pic credit: MRT Corp’s Facebook

RHB Investment Research reiterates a ‘Neutral’ call for the construction and manufacturing sector following the economy reopening in 4Q21 resulting in a higher value of construction work. 

It maintains a positive call for both Sunway Construction Group Bhd and MGB Bhd with a target price (TP) of RM1.74 and RM0.99 per share respectively. 

RHB analyst Adam Mohamed Rahim said, the sector’s GDP grew by 6.8% YoY to hit RM12.6 billion in 4Q21 and the construction activities level has reached the pre-pandemic level. 

“We observed that the activity levels of contractors have returned to normalcy in 4Q21 as seen from the higher progress billings in tandem with the economic reopening,” Adam noted. 

He also added that despite the sales of construction companies having increased materially, due to the spike in raw material prices, the steel prices have appeared to decline to RM2,979 per tonne in January 2022, versus the peak of RM3,255 per tonne in July 2021. 

“The overall situation remains fluid, however, given the global geopolitical tensions at the moment, we also anticipate the cost pressures to remain upside down.” 

“Nonetheless, certain companies are still affected by the hike in raw material prices, which eroded their margins. As such, we shaved down our financial year 2022 (FY22)-FY23 net profit forecasts by 9% and 6% respectively.” 

“Despite that, we are still expecting FY22 earnings to grow by 19% YoY (year-on-year),” the research noted. 

The research house remains positive with Sunway Construction and MGB given its supportive catalyst record to buffer near-term risks, supported by stable orderbook replenishment rates and robust balance sheets. 

“With companies set to progress with their existing projects, this will be a further catalyst for the construction works. Another recent news of the reactivation of the Mass Rapid Transit Line 3 (MRT3) project will also boost the sector.” 

Following the announcement, MIDF Research recently upgraded the sector call from ‘Neutral’ to ‘Positive’ after the Prime Minister announced the permission of MRT3 rollout. 

MRT3 is noted to commenced earlier than the market expectations of 2QCY22. 

“MRT3 is a potential rerating catalyst of the sector, which is expected to be built over a ten-year period. In our opinion, this is a positive for industry players because of the large orderbook replenishment for construction businesses,” it said. 

MRT3 will have a length of about 50km, with a circular alignment running along the perimeter of Kuala Lumpur city. 

The most awaited project was previously scrapped after the Pakatan Harapan took over Federal administration in May 2018, and was further delayed by another change of government in March 2020 along with other tender issues. 

“Upon revising, we estimate the cost of MRT3 could range from between RM27 billion and RM32 billion higher than MRT2 due to its higher underground portion of 40% compared to 23.4% of the MRT2,” it said. 

“We expect the underground package to be the largest contract, in which Gamuda Bhd potentially to be the major early beneficiary, thus we maintain our ‘Buy’ recommendation for Gamuda with a TP of RM3.63 per share.” 

Other top companies which MIDF Research maintains the ‘Buy’ call include IJM Corp, with a TP of RM1.90, Sunway Construction, RM1.80, Gabungan AQRS Bhd with (TP) RM0.64 and Malayan Cement Bhd at RM3 per share. 

“After considering all factors, we are upgrading our recommendation on the sector from ‘Neutral’ to ‘Positive’ on the back of our optimistic outlook on the sector,” MIDF Research noted.