Construction stocks in focus ahead of Budget 2017

KUALA LUMPUR (Oct 4): Some of the major construction and construction-related stocks have already been rallying in the past three months in anticipation of more job wins especially under Budget 2017 which is scheduled to be tabled in parliament on Oct 21. After gaining as much as 39%, is there more upside to the rally?

Under Budget 2016, federal spending for infrastructure was mainly focused on urban rail expansion, namely the mass rapid transit 2 (MRT2) and light rail transit 3 (LRT3).

Not surprisingly, the construction industry is expected to remain the biggest beneficiary of the upcoming federal budget, and for that reason, some investors are looking at how construction stocks could help rebuild their portfolio.

In the third quarter of this year, some of the biggest gainers among construction stocks include Gadang Holdings Bhd, Ekovest Bhd and Econpile Holdings Bhd (see table).

Home-grown builder Gadang topped the list as its counter jumped 82 sen or 39% to close at RM2.91 last Thursday, giving it a market capitalisation of RM744.8 million.

Ekovest, an integrated construction and infrastructure group, also saw its share price surge 43 sen or 29%, to settle at RM1.93, giving it a market value of RM1.63 billion.

Shares in Econpile, a piling and foundation specialist, soared 40 sen or 31% to RM1.71, with a market capitalisation of RM925.6 million.

Meanwhile, the likes of Kerjaya Prospek Group Bhd, OKA Corp Bhd, Kimlun Corp Bhd and Malaysian Resources Corp Bhd, gained between 15% and 25%.

Familiar names such as WCT Holdings Bhd, Cahya Mata Sarawak Bhd and Lafarge Malaysia Bhd also rose 9%, 8%, 7%, respectively.

Interestingly, some of these construction and construction-related stocks are still trading at a relatively low price-earnings ratio (PER) after the rally.

For instance, Ekovest and WCT were trading at a PER of 10 times, while Kerjaya Prospek, Gadang, Kimlun and OKA were trading at single-digit PERs.

It is also worth noting that nine out of the 10 top gainers in the construction and related sectors are currently trading below their consensus target prices, except for Lafarge Malaysia. In other words, there could still be upside potential in these construction stocks as they continue to draw investor interest.

Sunway Construction Group Bhd director Kwan Foh Kwai, who has almost 40 years of extensive experience working in the construction industry, opined that Budget 2017 will most likely be a rakyat-friendly national budget, and hence, more affordable housing and sewerage projects can be expected.

“If the global oil price stays above US$45 (RM185.85) per barrel, which is better than last year, I think the budget deficit will be manageable. We are looking from the whole country’s perspective, whether there will be more money budgeted for infrastructure development, then only we can talk about [how to] benefit from it,” he told The Edge Financial Daily over the phone.

“We are aware that there are more projects coming in, but that doesn’t mean that we are overly optimistic about that. All of us need to be realistic,” Kwan added.

Bina Puri Holdings Bhd executive director Matthew Tee Kai Woon is of the view that Budget 2017 will be positive for construction firms, with more contracts to be awarded in the final quarter of this year.

“The immediate one will be MRT2 and LRT3, followed by the Sabah section of Pan Borneo Highway next year,” he commented.

Tee also advised investors to start looking at construction stocks, because they are the prime beneficiaries of mega infrastructure projects.

“It should be a good year for us. If the oil price rebounds, there will be a lot of oil and gas projects that require general works from us,” he further said.

TA Securities senior analyst Ooi Beng Hooi, however, questioned how much further can construction stocks rise, considering that most of the mega infrastructure projects have already been priced in by investors and analysts.

“MRT2, LRT3 [and] Pan Borneo Highway are very much known by the market, because these projects had been talked about even before their contract awards. Basically, the construction sector will be very busy, but I don’t see any major positive surprise from the budget,” he said.

Ooi also warned that should there be any project delay, it could actually present downside risks to construction stocks, although he doesn’t see that happening at the moment.

“Overall, the budget announcement is likely to meet the market’s expectations, so I am not overly excited about construction stocks. Yes, I think their share prices can sustain at current levels, but there is a lack of new catalyst, so their upside will be limited,” he said.

In a note dated Sept 27, UOB Kay Hian head of research Vincent Khoo highlighted that Ekovest, Gamuda Bhd, Sunway Construction, IJM Corp Bhd and WCT could be the potential winners of Budget 2017, as big infrastructure developments remain a bright spot.

“Apart from the rolling out of the many approved mega projects, including LRT3, MRT2 and the high-speed rail linking Kuala Lumpur and Singapore, the government said it had lined up RM12.75 billion to address bottlenecks across the country’s main ports and airports. A further RM34 billion worth of rail, road, port and airport-related investments are under study,” he wrote.

Recall that Budget 2016’s net development expenditures were raised by 6.1% to RM49.2 billion.

Khoo said Budget 2017 should benefit from a total of RM12.75 billion allocated for current projects in rails (RM8.59 billion), roads (RM1.13 billion), maritime (RM3.03 billion), and aviation, on top of an additional RM34 billion worth of infrastructure investments under study.

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This article first appeared in The Edge Financial Daily, on Oct 4, 2016. Subscribe to The Edge Financial Daily here.