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Construction stocks 'look set for change in fortunes'

Analysts say some counters appear undervalued; point to expected building boom following wave of en bloc sales

Construction companies on the Singapore Exchange may have seen muted performance as real estate counters have by comparison heated up amid the recovery of the private residential market.


CONSTRUCTION companies on the Singapore Exchange may have seen muted performance as real estate counters have by comparison heated up amid the recovery of the private residential market.

But better fortunes for construction firms on the bourse may be on the way, analysts said.

The FTSE ST Real Estate Holdings and Development Index has outperformed the FTSE ST Construction and Materials Index, delivering an increase of nearly 30 per cent in the whole of 2017 and 2.70 per cent this year in total returns through May 11.

In comparison, the FTSE ST Construction and Materials Index saw a 12.4 per cent rise through last year, and has fallen 2.24 per cent in total returns.

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NRA Capital's head of research Liu Jinshu said the developers' run-up in share prices likely stemmed from the increased demand from buyers that helped clear inventory.

But construction counters saw more subdued interest as they had not yet seen orders trickle in.

Advance GDP estimates for the first quarter this year showed that the construction sector shrank 4.4 per cent year-on-year for the sixth consecutive quarter, even as GDP grew 4.3 per cent year on year.

Jitters over geopolitical tension this year may also have played a role, said Nicholas Siew, a research analyst at KGI Securities Singapore.

But with an impending increase in building demand expected here, analysts say that some stocks may be undervalued opportunities.

"Barring a global economic slowdown, I expect construction stocks to outperform in 2018 as valuations in this sector remain attractive and investors are likely to revisit these counters when higher order books translate to higher reported earnings later," said NRA Capital's Mr Liu.

He added that a few counters, such as Lian Beng Group and Keong Hong Holdings, are trading at single digit P/E multiples and below their book values, Mr Liu said.

Colin Tan of CGS-CIMB called Yongnam Holdings his top pick and has an "add" call on the stock. The stock closed on May 11 at a price to book ratio of 0.5 according to Bloomberg data.

"Catalysts (that could spur construction stocks to climb) would probably come from winning major sized contracts out there, especially in the civil engineering space."

The Building and Construction Authority (BCA) predicted in January that S$26 billion to S$31 billion of construction contracts could be awarded this year, up from S$24.5 billion last year.

About 60 per cent of the total projected demand is supposed to come from the public sector, BCA said.

Some listed construction companies are expecting orders to come in, or have seen some stream in already.

Yongnam Holdings has posted yearly net losses since FY2014. Its order book stood at S$152 million as at end-Dec 17, below its seven-year average according to CGS-CIMB.

But chief executive officer Seow Soon Yong believes the government will be spending more in the next decade for mega-infrastructure projects like Changi Airport Terminal 5 and Tuas Port.

This year, it secured four contracts worth S$22.9 million for works at Health City Novena, the Thomson-East Coast Line and Circle Line 6, he said.

CSC Holdings, which has been in the red each year since FY2015, recently secured orders for foundation works for the Kim Chuan Depot extension.

It said the upcoming Punggol Digital District could yield opportunities that could potentially be bigger than its S$200 million order for the Marina Bay Sands development in 2007 to 2008.

The en bloc boom will also soon see opportunities for builders here. Last year, 30 sites netted a total value of S$8.7 billion in collective sales, against 2016's S$1 billion from three residential sites.

KGI's Mr Siew pointed to the fact that developers have a five-year deadline from being awarded the site to build and sell all units.

"We will see a lot of construction activity from these collective sales," he said. "And generally, we should see the construction sector pick up."

Neo Tiam Boon, chief executive officer and executive director of TA Corporation, said he expects property developers to launch their projects in the next six to 12 months and believes it is well-positioned to secure contracts.

Still, analysts warned that tender prices need to rise in order to deliver higher margins to builders here.

DBS analyst Alfie Yeo said: "Tender prices have come off a peak of 120 points in 2007 to a 10 year low of 96.7 points in 2017. A more concrete recovery of tender prices will be beneficial to the sector in terms of profitability."

Mr Siew of KGI said: "While we should see relatively more projects/

contracts being awarded to listed construction companies in the next three years at least (from the collective sales), it is also important to note that there are many other private players out there competing for the same projects as well."

The ability to win a contract ultimately depends on each builder's track record and the competition, he added.

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