AFFIN Hwang Capital Research has maintained its underweight call on the construction sector given its weak earnings visibility due to the movement control order (MCO) impact and order book replenishment concerns.
In a note on April 20, the research house said its top buys are Sunway Construction Group Bhd (SunCon), AME Elite Consortium Bhd and Taliworks Corporation Bhd. However, its top sells are Gamuda Bhd, IJM Corp Bhd and Malaysian Resources Corporation Bhd (MRCB).
Due to the prolonged MCO, the research house said it 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),” said the research house.
However, the sector’s net gearing is below the historical average while interest coverage and quick ratios are at comfortable levels.
“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,” it said.
Certain projects including the mass rapid transit 2 (MRT2), light rapid transit 3 (LRT3), East Coast Rail Link (ECRL) and Pan Borneo Highway will likely be allowed to continue although there will also likely be limits on the number of workers and working hours, which will hamper work progress.
Affin Hwang noted the contractors involved include Gabungan AQRS, Gamuda, HSS Engineers, IJM Corp, MMC Corp, MRCB, Sunway Construction and WCT. — April 20, 2020
