Sector of the year - Construction: Boost from a flurry of contract flows

Posted on 27 December 2016
 

Source: The Edge

WHILE many businesses are concerned about the current slowdown that has taken a toll on earnings, the domestic construction sector probably does not share the same fate.

The surge in infrastructure building activities this year has kept construction players busy as they replenished their order books.

The slew of infrastructure contracts being awarded has helped whet interest in construction stocks.

The FBM KLCI ended lower by 2.79% between Jan 4 and Dec 13, while the KL Construction Index actually gained 4.66%. It should not come as a surprise as the sector has been given a new lease of life after a lull in 2015.

Contracts were rolled out at a fast pace this year, making construction stocks exciting again among investors. The contracts awarded have been substantial, totalling some RM59 billion, which far exceeded the RM22 billion worth of contracts awarded in 2015.

This year has been good for construction players as they saw several large projects awarded, such as the Mass Rapid Transit 2 (MRT 2) and Pan Borneo Highway, and relatively smaller projects like Duta-Ulu Kelang Expressway (DUKE) and Sungai Besi-Ulu Kelang Elevated Expressway (SUKE). The total value of these four projects make up the bulk of the contracts rolled out this year.

The plus point about the job flows awarded, says industry observers, is that it has been spread out into multiple packages — benefiting a wider pool of contractors.

One notable mention is Johor-based Kimlun Corp Bhd, which became the first peninsula-based contractor to get a slice of the RM16 billion Pan Borneo Highway project in Sarawak. It secured a package of contracts worth RM1.46 billion together with its local partner, Zecon Bhd, to build 73km of roads, three flyovers and 20 bridges.

Kimlun’s portion amounted to RM438 million. This is its single largest construction contract in its 40-year history. Its stock has continued its steady upward trajectory since the contract was awarded. Between March 10 and Dec 13, it gained 26% from RM1.73 to RM2.18.

Besides Kimlun, other peninsula-based companies like Bina Puri Holdings Bhd, WCT Holdings Bhd, Gamuda Bhd, Mudajaya Group Bhd and TRC Synergy Bhd managed to secure a package in the lucrative contract together with their respective local partners.

The Pan Borneo Highway packages are valued at more than RM1 billion each.

The 2,239km highway will connect Sabah and Sarawak with Brunei and is expected to cost RM29 billion — RM16 billion for the Sarawak stretch and RM13 billion on the Sabah side.

The MRT 2 packages, though smaller in value than the Pan Borneo Highway ones, have also generated a lot of excitement this year. The entire project is valued at RM32 billion, with some RM27 billion worth of packages awarded as at November.

Gamuda Bhd, with its joint-venture partner MMC Corp Bhd, took the largest package by value that Mass Rapid Transit Corp Sdn Bhd had to offer. The package to construct tunnels, stations and associated structures from Jalan Ipoh to Desa Waterpark was valued at a whopping RM15.47 billion. Gamuda’s 50% stake in the venture would mean that its portion is worth about RM7.7 billion.

Analysts believe the company is now entering a new multi-year earnings upcycle. Its construction order book is estimated at a record high of RM9 billion.

“As we mentioned previously, we remain positive about its longer-term earnings outlook. We anticipate earnings to rise from FY2017 onwards when the MRT2 project goes into full swing,” says BIMB Securities Research in a report.

The construction giant’s stock has climbed 7% since the beginning of the year from RM4.55 on Jan 4 to RM4.87 as at Dec 13.

Besides the MMC-Gamuda joint venture, other notable MRT 2 packages went to Ahmad Zaki Resources Bhd, which was the first to be awarded the RM1.44 billion package for the viaduct work. IJM Corp Bhd and Sunway Construction Bhd were also awarded viaduct work packages worth RM1.47 billion and RM1.21 billion respectively.

The excitement in the construction sector should continue to last well into 2017, given the promise of several upcoming massive infrastructure projects. Analysts’ estimates show that there is at least RM204.3 billion worth of projects to be implemented over the next two years.

A significant part of it will come from the rail projects, such as the RM55 billion East-Coast Rail Line, RM40 billion KL-Singapore High-Speed Rail, RM9 billion LRT 3, RM7.1 billion Gemas-JB Tracking, and the remaining work for MRT 2 and MRT 3 whose value has not been announced.

There is also the RM30 billion Melaka Gateway trading port, which will be a joint venture between state-funded KAJ Developments and China’s PowerChina International. The project, together with the East Coast railway line, is part of a slew of trading agreements signed with China during Prime Minister Datuk Seri Najib Razak’s visit there in November.

The construction sector can also look forward to works for the Tun Razak Exchange, Bandar Malaysia, Pan Borneo Sabah and the Kwasa Damansara developments.

With the flurry of infrastructure activities and the promise of more in the future, there should not be a dull moment for the construction sector, going forward. 



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