Construction sector expected to remain in the doldrums a while longer

IT is no secret that the construction sector is languishing from an array of industrial challenges, which is further exacerbated by the current pandemic-stricken operating environment.

Since the beginning of 2021, the Bursa Malaysia Construction Index has experienced a steep decline of 12.5% from 186.67 to 163.42, underperformed the broader FBMKLCI index which fell 2.6% for the same period.

TA Securities Research has revealed that due to the slower-than-expected rollout of new mega infrastructure projects since the 14th General Election (GE14), majority of the infrastructure contractors under its radar saw a decline in their outstanding order book.

“They include major construction companies such as Gamuda Bhd, Sunway Construction Group Bhd and WCT Holdings Bhd,” noted analyst Ooi Beng Hooi in a construction sector update.

“On the other hand, despite the challenging market condition last year, building contractors such as Kerjaya Prospek Group Bhd, GDB Holdings Bhd and Inta Bina Group Bhd recorded impressive order book replenishment and boosted their outstanding order books to all-time high.”

Moreover, being one of the sectors most affected by the COVID-19 pandemic, the pandemic and movement control order (MCO 2.0) has affected the financial performance of construction companies since 2Q CY2020.

“Besides temporary suspension of works at sites due to presence of COVID-19 cases (there are currently 82 clusters involving construction sites), the compliance with standard operating procedures (SOPs) and test requirement has resulted in additional costs and a drop in operating efficiency at construction sites,” justified Ooi.

“With escalated number of daily new COVID-19 cases in Malaysia, we expect the adverse operating environment to drag on till 2H 2021.”

Piling to the pressure is the cautious sentiment arising partly from the recent surge in steel bar price, according to TA Securities Research.

Since late-2020, the price of steel reinforcement bars has begun to rise due to an increased demand from China as well as a surge in iron ore price.

As of early-February 2021, the price of steel reinforcement bars is estimated at about RM2,650/metric tonne (MT)-RM2,750/MT.

“If the price stays at such elevated level throughout the year, we expect the construction margin to be eroded by 1%- to 2%- percentage points in general,” opined Ooi.

On the bright side, the research house expects sentiment to improve in 2H 2021/1H 2022 when significant doses of the COVID-19 vaccine have been administered in Malaysia.

“This is expected to be followed by a recovery in the property sector which boosts demand for building jobs as well as more news flow on the roll-out of new mega infrastructure projects,” envisages Ooi.

All-in, TA Securities Research has upgraded its outlook for the construction sector to “neutral” from “underweight” as it opined that the recent drop in share price of construction stocks has in general reflected the downside risks of the sector. – Feb 5, 2021

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