Friday 29 Mar 2024
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KUALA LUMPUR (Dec 7): AmInvestment Bank Research has downgraded the construction sector to “Underweight” (from Neutral) and said that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals.

In a sector update today, it said This change is largely triggered by:

  1. The new administration’s move towards fiscal sustainability, which translates to reduced spending on public infrastructure projects.
  2. The emergence of a two-party political system in Malaysia following the recent 14th general election (GE14).

It said this enhances the checks and balances within the system of government, particularly the public procurement system. With   a strict adherence to open bidding in the award of government contracts (under a tight scrutiny by the opposition and the media), we envisage a “new normal” for construction margins which will be, at best, only half of what they used to be.

The research house said it now values construction stocks purely based on P/E.

“We value large- and mid-cap construction stocks (more than RM2 billion in market capitalisation) at a 10x forward P/E multiple while small-cap construction stocks (less than RM2 billion in market capitalisation) at 8x (other than Hock Seng Lee Bhd of which we value at 9x, a slight premium over its peers, to reflect a less crowded construction market in East Malaysia vs. Peninsular Malaysia).

AmInvestment said amidst the heightened earnings risk from construction and building material (due to the downsizing of existing public projects and the cutback on new ones), property (due to the prolonged sector slowdown) and infrastructure (due to the potential expropriation or some form of restructuring), the market will derive greater comfort by valuing construction stocks based on their near-term earnings potential, i.e. P/E.

“We may upgrade our Underweight call on the sector to Neutral/Overweight if the government decides to pumpprime the economy with public projects in the event of external shocks such as an unexpected slump in the global economy,” it said.

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