Contract awards are expected to remain strong in 2H16 with the expected roll out of the RM5.3bil SUKE and RM4.2bil DASH highways, and the RM9bil Light Rail Transit Line 3 (LRT3) projects.
KUALA LUMPUR: Affin Hwang Capital Research remains bullish on the construction sector in the second half of 2016 and its top buys are Sunway Construction, WCT and Gamuda.
It said on Wednesday it believes new contract awards will see a strong rebound in 2Q16 as most of the Klang Valley MRT Line 2 (MRT2) packages were awarded.
“Contract awards will remain high in 2H16 as we expect infrastructure projects worth RM49bil to be rolled out,” it said.
Affin Hwang Capital Research expects sector fully-diluted core EPS growth to accelerate from 3% on-year in CY16E to 16% on-year in CY17E.
“We remain Overweight on the construction sector as news flow on contract awards will sustain the sector outperformance. On the macro front, the higher current oil price than the amount assumed in the revised Budget 2016 gives the government some flexibility to increase the development expenditure budget to support economic growth.
“We see better values among the mid-cap construction stocks such as Suncon and WCT. We prefer Gamuda to IJM Corp for large-cap construction stock exposure given the Gamuda’s higher ROE and order book/revenue ratio (better long-term earnings visibility),” it said.
According to the Construction Industry Development Board (CIDB) statistics, construction contract awards fell 66% on-year to RM11.9bil in 1Q16.
"We believe the contract awards bottomed in 1Q16 and should rebound strongly in 2Q16. We estimate MRT2 work packages worth RM22.7bil were awarded year-to-date and most of the contracts will likely be captured in CIDB’s statistics in 2Q16 due to the lag in reporting," said the research house.
Contract awards are expected to remain strong in 2H16 with the expected roll out of the RM5.3bil SUKE and RM4.2bil DASH highways, and the RM9bil Light Rail Transit Line 3 (LRT3) projects.
Another RM12.9bil for the eight remaining packages of the Pan Borneo Highway (PBH) Sarawak section and RM2.2bil for the West Coast Expressway (WCE) are expected to be awarded in 2H16.
“Aggregate construction sector net profit contracted 64% on-year and 62% on-quarter in 1Q16 as Eversendai, IJM Corp and WCT were hit by unrealised forex losses. But core net profit rebounded 19% on-quarter driven by higher operational earnings but was still down 4% on-year in 1Q16.
“We believe the construction sector is seeing an intermission break as ongoing projects are at the tail-end while new contracts have not contributed significantly to earnings yet.
“We expect better performance in 2H16 as earnings contribution from new contracts accelerates. But the full impact will only be felt in 2017 due to the typical “S” curve in construction project earnings recognition,” said Affin Hwang Capital Research.
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