Building and construction stocks surge in anticipation of recovery

Singapore

THE local construction industry is still reeling from the aftermath of Covid-induced lockdowns last year. But investors have already begun to look forward to an earnings recovery on the back of a rebound in demand - both locally and abroad.

This past week, shares of building materials provider EnGro Corporation and ready-mixed concrete (RMC) supplier Pan-United Corporation (PanU) hit new 52-week highs.

EnGro touched an intra-day high of S$1.27 on Tuesday while PanU rose as high as S$0.35 on Thursday. They closed at S$1.18 and S$0.345, respectively, on Thursday.

Other building material-linked players have been edging higher too.

Catalist-listed GKE Corporation, which has an RMC plant in China, closed at S$0.138 on Thursday. It is up 15 per cent for the year, and 155.6 per cent over the last 12 months.

Steel fabricators BRC Asia and TTJ Holdings have also seen their share prices rise, by 47.6 per cent and 35.1 per cent, respectively, in the past year.

There is a good reason for this optimism. In January, the Building and Construction Authority projected total construction demand in 2021 to recover to between S$23 billion and S$28 billion from the preliminary estimate of S$21.3 billion in 2020. Public sector projects are expected to comprise some 65 per cent of this demand.

Yongnam Holdings, another steel fabricator, said it is "actively pursuing a number of upcoming mega public sector infrastructure projects in Singapore, including various major contracts for the North-South Corridor, Jurong Region MRT Line, Cross Island Line and commercial projects, including the Marina Bay Sands expansion".

The total value of the infrastructure and commercial projects across Singapore and Hong Kong that it is looking to snag stands at some S$788 million.

As companies begin to announce project wins, investor interest in construction plays could pick up.

But given the share price appreciation so far, how much room is there for these stocks to run? And which ones look most attractive for investors just now?

In the recovery following the 2008 financial crisis, Yongnam's counter nearly trebled from S$0.35 at end-2008 to S$1.02 at end-2009 after it won contracts for major projects such as the Marina Coastal Expressway, Marina Bay Sands Integrated Resort and Gardens by the Bay.

Shares of BRC Asia ended 2008 at S$0.50 then more than doubled to S$1.15 at end-2009.

Shares of PanU rose 37.7 per cent in the same period, while EnGro's and GKE's shares gained more than 50 per cent.

Past performance is no indicator of future returns though. BRC Asia is more expensive than some of its peers on a price-to-book (P/B) basis.

It currently trades at a P/B ratio of 1.34 times. Meanwhile, TTJ Holdings trades at 0.41 times; Yongnam Holdings trades at 0.33 times.

Investors will also want to watch gearing ratios.

High borrowings have tripped construction players up in the past, and to take on projects in the post-Covid recovery they may need to take on some debt.

The most heavily geared of the lot is Yongnam Holdings, with a gearing ratio of 90 per cent as at end-FY2020. TTJ's gearing ratio stood at 11.1 per cent at the end of its FY2020 ended July 31; PanU's stood at 18 per cent as at end-December 2020.

Meanwhile, some of these construction plays are already reporting numbers that could give investors confidence.

GKE, for instance, more than trebled its net profit for the six months ended Nov 30, 2020 as its plant in China churned out more RMC and it recorded higher average selling prices.

EnGro posted a 26.2 per cent decline in revenue for FY2020 but net profit grew 99.3 per cent from S$11.05 million to S$22.02 million.

This was attributed to venture capital investment gains and profits from phase two of the group's joint venture property development project in Tangshan China.

"The balance of phase two of our joint venture property development project in Tangshan China is expected to be profitable when it is fully completed in H1 2021," EnGro said.

Certainly, the construction sector is becoming one to watch.