Research house remains positive on construction sector

PETALING JAYA: MIDF Research has maintained its positive stance on the construction sector, citing it believes that the current tide of liquidity took some heat off from the sector.
In a note last Friday, its analyst Fadhli Dzulkifly said loans to the sector are boosted by a stabilising shot of lower disbursement rate which makes it easier for cherry picking.
Fadhli said risk-seeking has toned down and sectoral price-to-earnings (PER) aerated from its last report on May 24, 2017 of 26.7 times to current 23.3 times. “Even heavyweights such as IJM Corp and Gamuda took a breather by registering only -1.97% and -0.18% from our last note.”
However, Fadhli said, robust liquidity is still prevalent, as the current disbursement rate of RM5.59 billion is well above the sector’s 11-year median of RM4.17 billion or +34.1%.
He added the research house predicts the sector would not be able to maintain the dizzying height of 26.7 times PER of March 2017, when the National Development Plan (NDP) was unveiled with a promise of an extension of MRT 1.
“Hence, FYE17-FYE18 could be the year that Kuala Lumpur Construction Index‘s valuations i.e. PER will normalise within our expectation of 17.5 times,” he noted.
Furthermore, Fadhli said, the cavalcade of potential infrastructure projects under the NDP reiterates the government’s commitment to boost rural and urban connectivity.

He said the rollout is timely as infrastructure project awards tumbled to 26 projects only in March 2017 (-85.1% y-o-y) or 142 projects in Q1’17 (-63.9% quarter-on-quarter).
“Thus, we consider that NDP would be the ‘cavalry’ to bolster the sector. We reckon the impact will be seen in FYE18-FYE19 as FYE17 may welcome the 14th General Election after the SEA Games in August,” he said.
Meanwhile, Fadhli said the research house’s views on earnings attractiveness is represented by the spread between five-year MGS and earnings yield of companies under coverage. To date, the spread has improved with companies such as IJM and Cahya Mata Sarawak Bhd turning positive compared to May 2017.
However, he said companies such as Malaysian Resources Corp Bhd (MRCB) and small-caps such as Muhibbah Engineering (M) Bhd, Gabungan AQRS Bhd and Vivocom International Holdings Bhd are most persistent despite being inundated among other companies.
“We regard the spread as moats showing the intrinsic strength of the respective companies. As such, we continue to favour Muhibbah and MRCB as our leading choice.”