UOBKH selective on Malaysian construction amid uncertain public infrastructure plans

BATTERED by the prolonged Movement Control Order 3.0, Malaysian construction companies have suffered from disappointing earnings and supply chain disruptions.

As the roll out of infrastructure projects in the country remains uncertain, UOB Kay Hian (UOBKH) analyst Afif Zulkaplly selectively maintained "buy" on Kerjaya Prospek Group and WCT Holdings in a research note released on Tuesday.

He also maintained market weight on the sector as it continues to trade at 0.74 times the sector's 2022 forecasted book valuation, which is lower than the sector's five-year historical average of 0.93 times.

Looking at Kerjaya, the analyst liked that the company has been able to secure private sector jobs and consistent internal job flows. This, coupled with its strong net cash position of RM196 million (S$63.4 million), should help it weather the pandemic in the face of uncertain government infrastructure plans.

WCT also aims to raise RM1 billion through various corporate exercises to reduce its gearing level, lower its financing cost and improve earnings. It recently announced the disposal of its Sungai Buaya land for RM214.3 million, and is expected to record a RM45.4 million gain from the transaction.

Aside from its asset monetisation plans, the analyst also liked that WCT could benefit from contracts under the Pan Borneo Highway Project.

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Senior Works Minister Datuk Seri Fadillah Yusof said that the mega project in Sarawak was 69.6 per cent complete on Aug 14, although delays resulting from lockdowns to curb the pandemic may arise.

As for the rest of the sector, UOBKH's Mr Zulkaplly recommended that investors pay attention to the Malaysia 12th Plan as it may catalyse a sector-wide share price rally on renewed optimism. It is scheduled to be tabled on Sept 27.

"Should that happen, we recommend investors to take profit with the view that the optimism could be short-lived as it might take some time before we see concrete progress on the construction-related plan due to the government's current financial position and priorities," he said.

Malaysia's Budget 2022 is unlikely to spur interest in the construction sector either as the government focuses on other priorities such as lower-income groups and the public healthcare system.

Significant improvements may only come after the next general election, due 2023, when the country has a more stable government, Mr Zulkaplly said.

The MRT3's contracts, a RM30 billion project that will be up to 30 per cent privately-funded, could also be awarded later than the MRT Corporation's previous guidance of Q4 2021.

Companies expected to potentially benefit from the construction of the line, which is under the Klang Valley Mass Rapid Transit Project, include Gamuda, MMC Corp, Sunway Construction, IJM Corporation and WCT.

For the rest of the construction sector, accelerated billings from construction order book backlogs are expected to drive earnings in the fourth quarter of this year, the analyst said.

Still, construction margins are expected to remain low in the near term due to sub-optimal productivity levels, higher operating costs attributed to compliance with Malaysia's Covid-19 SOPs and high construction material costs.

Furthermore, growth of the sector could slow further if projects, especially those that have been approved, see slower-than-expected roll outs.

"This will result in the depletion of contractors' outstanding order books due to a shrinking pool of new contracts."