HLIB: Construction-sector earnings to double in 2022 on higher productivity, margins

KUALA LUMPUR (Dec 23): Hong Leong Investment Bank (HLIB) Research forecast construction-sector earnings to double in 2022, driven by higher productivity and margins.

In a sector outlook on Wednesday (Dec 22), HLIB Research said job awards could recover, driven by both the private and public sectors.

According to the research firm, construction gross domestic product is slated to rebound 16.6% in 2022 and that in tandem, the firm has pencilled in a doubling of sector cumulative earnings driven by higher site productivity and better margins. 

HLIB Research noted that its financial year 2022 forecasts are roughly 15% lower than pre-Covid-19 levels on account of impaired productivity, a worsening labour shortage, hostile cost environment and lower outstanding order book.

“We see a limited scope for earnings upgrades as the aforementioned factors are likely to persist in 2022. To the contrary, should Omicron (the new Covid-19 variant) prove nastier, another earnings downgrade cycle might be triggered,” the firm said.

HLIB Research added that domestic jobs in the first 11 months of 2021 were public sector-driven, while the private sector floundered. 

As such, the firm cautiously expects gradually improving contract flows as Malaysia embraces endemicity with private-sector opportunities and roll-outs of public projects like the East Coast Rail Link, Pan Borneo Highway, Johor Baru-Singapore Rapid Transit System and Central Spine Road to keep the tap running in 2022.

“Higher development expenditure bodes well for the general tender environment even with new big-ticket projects missing. Implementation of existing megaprojects should also continue to selectively present opportunities.

“Developments of the Mass Rapid Transit Line 3 (MRT 3) could catalyse flows with open tenders targeted for next year’s third quarter [and] awards in 2023. Downside risks are Home Ownership Campaign expiry, rate hikes, delays due to high material prices and election overlaps,” the firm said.

HLIB Research also foresees elevated election risks denting sentiment next year, which could potentially weigh on news flow catalysts.

The firm said there were significant de-risking activities in the past two election cycles, resulting in pullbacks of 9% to 14% and price-to-book (P/B) derating of 13%/18%, but low sector ownership this time would mitigate it to some extent.

“Comparatively, we anticipate less pronounced volatility this time due to low foreign ownership of the heavyweights and low expectations. 

"However, 2022 could see an extra element of market unpredictability vis-à-vis past cycles with the stamp duty cap removed,” the firm said. 

Meanwhile, HLIB Research highlighted that the Bursa Malaysia Construction Index (KLCON) was lagging the FBM KLCI by -10.4% year-to-date as negatives like multiple movement control orders, High Speed Rail cancellation, political flare-ups and a disappointing Budget dragged the index. 

“Details of MRT 3 in April this year did little to spur the index to new heights as Covid-19 risks outweighed. On a relative basis, IJM Corp Bhd was the key performer, outperforming the KLCON by 14.1%, riding on its IJM Plantations Bhd value unlocking,” the firm said.

HLIB Research also retained its sector call at “neutral” as fluidity of the looming election could weigh on sector sentiment, with investors adopting a wait-and-see approach and sector valuations on the lower end at 12.2 times price-earnings (P/E) NTM earnings per share and 0.61 times P/B.

“The recent news flow of critical projects like MRT 3 was encouraging but we remain cautious about the timeline and overall sector earnings execution amid the ongoing virus spread,” the firm said.

Within the mid-cap space, HLIB Research prefers Sunway Construction Group Bhd and has given a “buy” call and target price (TP) of RM1.75 due to the latter's strong balance sheet, extensive track record of infrastructure projects and strong support from its parent company.

For small-caps, the firm likes Kimlun Corp Bhd and has rated it a “buy”, with a TP of RM1.07, for its solid order book, decent job visibility and niche exposure to MRT 3, with the stock trading at an attractive six times P/E multiple and 0.35 times P/B, offering good risk-reward.

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