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Construction Good Despite Rising Costs

By DANNY YAP

THE good times might be rolling in for the local construction industry in the first half of the year despite rising raw material costs.

Is there a reason to be cheerful? Most analysts seem to think so. 

While no one disagrees that the construction industry had seen better times, analysts contacted by StarBiz concurred this year would see the revival of the sector.

OSK Research analyst Mervin Chow said 2006 was a non-event for the sector but the research house expects the industry to pick up momentum this year. 

“There was already heightened spending by the Government in the third quarter of 2006,” he said, adding that the construction sector was slowly but surely improving.

Chow said there could be upside in earnings from the roll out of construction projects, mergers and acquisitions in the sector and upward revisions in toll rates for companies like Gamuda Bhd, Lingkaran Trans Kota Sdn Bhd, and MTD Capital Bhd.

“We expect continuous positive news flows to spur interest in the sector, especially as the Ninth Malaysia Plan (9MP) is entering its second year. 

“Also, we are not discounting the positive impact from the upcoming 12th general election later this year or early 2008,” said Chow.

He cited the twelve-month period prior to the 11th general election in 2004 when the KL Construction Index rose 30.9% on expectations of project awards under the 8MP. 

Moreover, the sector was buoyed by the implementation of mega projects under the 8MP.

On the winners for the construction sector, Chow said: “There’s no big secret on the beneficiaries of the 9MP. The big players are certainly the main beneficiaries but do not discount the impact on the smaller players who play significant roles in the 9MP.”

OSK Research, with its overweight call on the sector, favours large as well as small-capitalised stocks such as Gamuda Bhd, ACP Industries Bhd, Ahmad Zaki Resources Bhd, Hock Seng Lee Bhd, Crest Builder Holdings Bhd and Protasco Bhd.

Another local research analyst also believes there is more upside for the construction industry on the back of speedier implementation of the 9MP.

He said while the 9MP was well structured, the implementation of projects so far had lagged market expectations. 

“But this is going to change in the coming months as many projects worth billions have been awarded to the construction players and the Government expects the bulk of the projects to start soon,” he said.

The analyst said the impetus for growth in the construction sector would be in three distinct areas: 

·Northern Corridor – major developments are in store for Penang, with the second bridge, monorail and outer ring road, as well as the potential revival of the double-tracking railway project.

·Eastern Corridor – the focus is mainly on petroleum-related activities and the development of a biodiesel hub in Kuantan.

·Southern Corridor – the Iskandar Development Region taking centre stage to spearhead development in the south.

A foreign property consultant said Malaysia’s construction industry should bounce back in the second quarter, underpinned by the 9MP as well as favourable market conditions locally and abroad.

“The local construction sector is now in a healthier state as the big boys have diversified or gone overseas, making them less reliant on local projects to sustain their businesses.

“Mega and smaller projects awarded under the 9MP to construction companies are generally based on their track record. 

“There is greater planning and accountability on all levels from the Government to individual developers and contractors. Suppliers of raw materials to the industry will also benefit, “ he said.

The property consultant said selective construction stocks on Bursa Malaysia with attractive valuations could also make a comeback and interest investors.

“Some construction stocks have undemanding valuations and might be worthwhile for investors to take a second look,” he said.

On the rising cost of raw materials, he said items like steel, sand and cement were likely to increase further, fuelled by strong demand from China and India.

“However, petrol prices have gone down to mitigate rising transport costs. 

“Developers and contractors have also learnt to build mega structures and homes more efficiently through better designs and by substituting raw materials, wherever possible, to reduce costs but still maintaining standards,” he said.

Source : The Star Business, Monday 15 January 2007