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PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 5 Jun 2020, 9:37 AM

 

Construction - Month-Long Freeze

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With the extension of the Movement Control Order to 14th April in order to contain the domestic spread of the Covid-19 pandemic, we will see no construction activities for another 14 days in addition to the 14 days from 18 to 31 March. We see this as negative to companies’ earnings given no contribution to revenue as overhead costs continue to run, thereby compressing profit margins. We also foresee delays in the rollout of new contract awards given constraints in the Government’s coffers amid the current economic slowdown globally, lower crude oil prices and the need to re-prioritize expenditure toward tackling this health crisis. The change in government at the Federal level will also see some decisions put on hold, and is only likely to be looked at once the situation stabilizes. All said, we are maintaining our Neutral stance on the sector and trim companies’ earnings projection in response to the MCO and lower orderbook replenishment target for this year. The sector is currently trading at a forward PER of 10.2x, a 19% discount to its 3-year average of 12.6x which we deem justified given the current operating climate.

  • MCO extended, freezing all related activities. With the extension of the Movement Control Order (MCO) by the Government to 14th April from the original date on 31st March, construction activities will need to be stopped for another 14 days, bringing the total number of days of zero activity to 28 days. We see this as negative to companies’ earnings given no contribution to revenue as overhead costs (staff salaries, additional security personnel to monitor work sites) continue to run, thereby compressing profit margins. There may also be heightened uncertainties post-MCO in relation to workers that may or may not return, or smaller sub-contractor that have gone out of business given the current challenging period. We have been made to understand however that certain critical works, which include tunnelling jobs, will be exempted from the freeze order due to safety reasons. On this note, Gamuda’s MRT2 tunnelling works will continue.
  • Rollout of new contract awards will be delayed. Amid the current global economic slowdown and lower crude oil prices, we expect to see delays in the rollout of new contract awards given the constraints on the Government’s coffers. It is likely to reduce the development expenditure, with the allocation re-prioritized toward the most directly-affected sectors as well as the implementation of measures to help the people displaced by the Covid-19 pandemic. The anticipated contract award of a new big ticket projects this year, namely the East Coast Rail Link (ECRL) that was supposed to come online in 2Q, and the JB – Singapore Rapid Transit System (RTS) which has suspended until end of April (under the previous Government), may see further delays in the assessments on structure, alignment, concession agreement, tender process etc.
  • Maintain Neutral. The sector will be affected near-term by the i) Covid- 19 with the implementation of the MCO, ii) global economic slowdown and lower oil prices, tightening the Government’s budget for implementation of new projects, and iii) new ruling Government which will likely re-look into some past decisions such as toll road acquisitions, the Penang Transport Masterplan (PTMP) - LRT Bayan Lepas funding etc. We maintain our Neutral call on the sector. That said, we are optimistic on the roll-out of new mega projects next year, namely the MRT3 given that the construction sector is always seen as one of the key drivers in stimulating economic growth.
     
  • Adjustment to earnings. We are trimming earnings projection for companies under coverage, between 3.2% and 8.8% (Details in Table 1) reflecting the MCO and lower orderbook replenishment target for this year. We also adjust some valuation parameter and impute discounts to valuations to better reflect the current climate and inherent risks. With that, we derive a new TP for IJM of RM1.74, WCT of RM0.36 and HSL of RM1.09. All stock ratings are Neutral. We have recently made changes to Gamuda’s earnings and valuation in the 2QFY20 results review.

Source: PublicInvest Research - 27 Mar 2020

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Labels: IJM, WCT, HSL

Related Stocks

Chart Stock Name Last Change Volume 
IJM 1.94 -0.01 (0.51%) 1,273,800 
WCT 0.555 +0.005 (0.91%) 9,677,100 
HSL 1.11 +0.01 (0.91%) 60,400 

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