PETALING JAYA: After several consecutive quarters of positive growth for the construction industry, investor sentiment on the sector appears to be turning, mainly owing to negative news of possible delays or revaluation of mega projects
A case in point is the selldown on Gamuda Bhd from a 30-day high of RM3.44 on April 21 to RM3.08 yesterday.
TA Securities technical analyst Stephen Soo said news on further delays, especially in Penang where there remained disagreements, were worrying traders.
“At the same time, the market has also come off its peak since the Telekom Malaysia Bhd listing (ex-TM International Bhd),” he told StarBiz.
Soo forecasts 1,240 to 1,260 points as the immediate term support for the KL Composite Index. The benchmark index fell 11.66 points to 1,283.65 yesterday.
He said as the construction sector could be overbought, he anticipated further downside next month, which indicated its relative weakness versus the resilient oil and gas and plantation sectors.
In the medium term, Soo said the market would “try to find a bottom” at end-June.
On the other hand, Kenanga Investment Bank Bhd head of research Yeonzon Yeow does not think the outlook for the sector is bad.
“Most (construction counters) have booked in their projects for the next two years.
“Their earnings would come in within expectations, hopefully for those that were negotiated last year and this year as well,” he added.
Yeow said the contracts tendered for had built-in cost escalation and cost variation allowances so there would be little risk to margins, but before construction companies could complete negotiations, some counters might book losses.
Beyond the next two years, he said, ongoing projects were unlikely to be derailed since the state and federal governments “are both investment friendly.''
However, it would be a different story for the projects on which work has not commenced.
Yeow believes that the margins for such projects would be maintained, but “the quantum could be affected”.
He picks LCL Corp Bhd, TRC Synergy Bhd, Muhibbah Engineering (M) Bhd, WCT Engineering Bhd and IJM Corp Bhd as stocks that would be able to meet earnings expectation over the next two years.
Meanwhile, OSK Research has a neutral call on the sector “with a downside bias based on delay and non-commencement risk,” said its analyst Jeremy Goh.
However, Goh believes that much of the downside would have been factored into share prices by now.
Generally, he sees flat growth, or at best 1% growth this year, in contrast to the Bank Negara's official estimate of 5.5% growth, given that about 85% of the growth in the sector could be statistically attributed to government expenditure.
He attributed this to the lower government development expenditure of RM40bil this year compared with RM40.6bil last year.
Goh recommends construction players with large overseas exposure, naming WCT Engineering, which derives 67% of its order book from the Middle East.
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