MIDF Research positive on local construction sector

Filepic of construction workers at a building site in Kuala Lumpur. - AFP

KUALA LUMPUR: MIDF Research has maintained its “positive” outlook on the domestic construction sector, amid the strong flow of liquidity into the industry.

The research house said on Wednesday that total loans to the sector as at March 2017, increased by approximately 14.1% on a year-on-year comparison, to RM7.43bil. To note, total loans to the sector as at end-February 2017 stood at RM5.19bil.

“We believe that liquidity is a buoyancy parameter of the sector steered by not just the government through its infrastructure-focused policy, but also ‘higher-return’ mindset of institutions seeking excess return since Kuala Lumpur Interbank Offered Rate 3-month and 5-year Malaysian Government Securities show an anaemic and stagnating trend,” said the research house, while adding that the sectoral price-earnings ratio rose to 26.9 times which was unseen since October 2010.

MIDF Research stressed that the sudden liquidity surge is not a welcomed surprise, since liquidity impulse to the sector which could stretch the construction sector’s valuation and consequently masking its lofty valuations. 

“From January 2017 to March 2017, loans disbursed to construction sector totalled to approximately RM20.1bil, whereas the preceding period recorded a total of RM16.8bil. This registers a sharp increase of almost 19.6%. 

“On average, RM4.1bil worth of construction loans have been disbursed monthly into the sector for the past 11 years. Thus, it is only instinctive for us to depart from our positive stance to a cautious view of the sector considering excess liquidity,” stated the research house in its note.

MIDF Research indicated that the surge in credit liquidity to the sector could emanate from anticipation of an election in early fourth quarter of 2017 and announcements on big ticket project packages such as East Coast Rail Line (ECRL), High Speed Rail,Bandar Malaysia development, Kuala Linggi International Port and Baleh dam. 

“The recent Belt and Road Forum 2017 dished out construction related projects amounting to RM24.28bil, consisting of the Robotic City in Johor (RM15bil), The Shore, Kota Kinabalu (RM575mil) and Methanol and Derivatives project in Bintulu, Sarawak (RM8.7bil). 

“While such news supports the buoyancy of the construction sector, earnings are still chugging slowly. Therefore, we recommend a hard-nosed watch for red herrings namely East Coast Rail Line which would only bring the total of RM1.5bil of earnings, on the back of RM15bil jobs for local companies,” said MIDF Research.

The research house added that it we favours construction companies with strong core competency with diversified non-commodity revenue stream, as earnings are important despite the surge in liquidity for the sector.

“We remain positive with the prospects of Muhibbah Engineering Bhd, Malaysian Resources Corp Bhd and Gabungan AQRS Bhd due to their strong forte of construction backed by revenue stream from airport concession, facilities management and property development,” said MIDF Research.