Construction activities have been brought nearly to a standstill for a month since 18 March 2020 due to the government’s Movement Control Order (MCO). The MCO has been extended to 28 April 2020 but some approved projects will be allowed to resume on a case-by-case basis. There is earnings forecasts risks in 2020E if the MCO is prolonged. However, sector net gearing is below historical average, while interest coverage and quick ratios are at comfortable levels. We remain UNDERWEIGHT the Construction Sector. Top BUYs are SunCon, AME and Taliworks. Top SELLs are Gamuda, IJM Corp and MRCB.

Uncertainties Remain on Resumption of Work

Most listed contractors have applied to resume works on their construction projects. But we gather that the companies under our coverage have not received the government’s decision on the resumption of works. This is despite the extended MCO period starting on 15 April 2020 and ending on 28 April 2020. There is a risk that the MCO period could be extended further if the cases of Covid-19 infection remains high. Hence, the contractors continue to pursue the approval to resume works to reduce the risk of delays in the completion of projects.

Negative Impact of MCO

The MCO will impact construction and property development progress billings, traffic volume for toll highway concessions and property sales as show galleries are closed. Even when the MCO is lifted we expect a slow recovery as strict work and travel restrictions will likely remain, to prevent Covid-19 infection. We have assumed aggregate revenue for our universe of construction companies to contract 4% yoy in 2020E and 5% yoy in 2021E (-10% yoy in 2019). As a result, we expect sector core net profit to contract 9% yoy in 2020E and 1% yoy in 2021E (-25% in 2019).

Some Infrastructure Projects Are Likely to Resume Works

We believe the Klang Valley MRT Line 2 (MRT2), LRT Line 3 (LRT3), East Coast Rail Link (ECRL) and Pan Borneo Highway (PBH) projects will likely be allowed to resume. These projects have Centralised Labour Quarters (CLQ) near the project sites and construction works along the road or railway alignments will generally mean most workers practice social distancing. The resumption of these projects will benefit the contractors involved, which includes Gabungan AQRS, Gamuda, HSS Engineers, IJM Corp, MMC Corp, MRCB, Sunway Construction (SunCon) and WCT. However, the government will likely impose limits on the number of workers at each site and working hours to reduce Covid-19 infection risk. Hence, work progress may not resume at full capacity compared to before the virus outbreak.

Good Financial Position to Weather Downturn

We believe the construction companies are in a better financial position to weather the current cyclical downturn compared to the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC) periods. Based on Bloomberg data, we estimate aggregate construction sector net gearing was 0.59x in 2019, higher than 0.52x in 2008 (GFC) but lower than 1.26x in 1997 (AFC) levels. Sector interest cover was a comfortable 4.2x in 2019, the same level as 2008 but higher than 2.8x in 1997. Quick ratio was at a comfortable 1.1x in 2019, higher than 1.0x in 2008 and 0.7x in 1997. We remain cautious on the sector given the weak earnings visibility due to the MCO impact and order book replenishment concerns. Maintain our UNDERWEIGHT call on the sector.

Source: Affin Hwang Research - 20 Apr 2020