Highlights

In FPC’s press statement, we highlight 5 points that will have an impact on the construction sector. The only good news is the MRT Lines will proceed as planned.

(1) Public sector projects to be undertaken will be considered carefully;

(2) Low-import content and high-multiplier effects will be given priority;

(3) High import components will be sequenced accordingly;

(4) MRT Lines 1, 2 and 3 will proceed as planned; and

(5) High-Speed Rail project is still under negotiations.

Fiscal issue… Despite the notion that Government projects are the key drivers for the construction sector, projects have been largely coming from the private sector – namely for building developments. Hence, despite the “sexy” appeal of mega infrastructure projects, private sector jobs have been the bread and butter for the construction sector. Nonetheless, any deferment in rollout of key projects will still affect investors’ sentiment.

Property matters more… Most of the private sector construction activities are related to property developments. Most construction companies have moved up the value chain and property has been a key area for earnings growth. Hence, in our view, a slowdown in the property segment will have more pronounce effect on the construction sector as it will hamper both job opportunities and also property profits.

Account surplus issue… It is difficult to quantify the imported content for construction projects. Most of the imported contents are perishable items, M&E-related materials and works for instrumentation, control systems, process equipment, and signalling and communication scope. Two projects that have high import content that may be impacted are RAPID and the 2,000MW coal-fired power plant (Project 3B).

IPSAS issue… It will affect projects that involves Government support loan and Government guarantees. Highway projects will mostly be affected due to the risks and higher financing costs involved. In the case of highway privatisation, it may also be reconsidered.

All is not lost… Order book for construction companies is healthy, supporting earnings visibility for the next 2 years while unbilled property sales have also achieved decent backlog. Hence, we do not see a drastic need to cut earnings forecasts for the construction sector.

Rating/ Valuation

NEUTRAL

In view of the imminent delays of Government-related projects, potential tightening in the property sector, coupled with greater scrutiny from the opposition party, we DOWNGRADE the construction sector to NEUTRAL from overweight, albeit marginal impact on earnings.

Top Picks

IJM (BUY; TP: RM6.32) and Sunway (BUY; TP: RM3.18)

Source: Hong Leong Investment Bank Research - 4 Sep 2013