Analysts expect recovery in construction

PETALING JAYA: Analysts see a positive outlook for the domestic construction sector this year and expect selected construction stocks to be ripe for a re-rating in the coming months amid the implementation of “mega projects” under the Government’s stimulus packages.

CIMB Research has a “trading buy” call on the sector, mainly due to attractive valuations and on expectations the construction sector will recover via pump-priming activities by the Government, including a second stimulus package worth RM7bil to RM10bil.

“Even if our worst-case scenario forecast of a 0.5% GDP (gross domestic product) contraction this year pans out, it is unlikely that the construction sector growth will deteriorate to the extent that it did during the 1997 to 1998 Asian finacial crisis,” an analyst with CIMB Research said.

“Besides the planned implementation of the second stimulus package, newsflow on the progress of outstanding jobs worth RM61bil and weakening building material prices should arrest margin decline.” From Jan 8, 2008 to Dec 8, 2008, the Construction Index plummeted 48% to 164.2 points, exceeding the 39% drop in the KLCI.

Over this period, share prices of Malaysian construction stocks plunged 57% on average, hit by a slew of events such as the 18% to 26% increase in electricity tariffs, a steep 20% to 30% rise in the prices of building materials, and a whopping 40% rise in petrol pump prices.

Another local analyst agrees that the time is right for a recovery in the construction sector as the Government tries to boost economic growth by pouring funds into “mega” construction projects.

“But to have a positive and significant impact on the construction sector, the funds must be channelled in quickly and mega projects started as soon as possible to boost the sector’s growth,” he said.

The analyst said the spotlight would be on high-impact mega projects that could help support employment and the economy.

“The speed of development of mega projects like the transportation upgrade including the West Coast Expressway (which cost more than RM3bil), Pahang-Selangor water transfer tunnel (RM3.8bil), Langat 2 water treatment plant (RM5bil) and the Bakun power transmission line will be closely-watched,” he said, adding that about RM61bil had been allocated for these projects.

Nevertheless, he acknowledged that market conditions were still tough for the construction sector.

“Players in the construction sector now have difficulty raising funds to finance projects, especially larger projects because of the credit squeeze by financial institutions as they are more cautious in their lending practices due to the global economic downturn,” he said.

By The Star (by Danny Yap)