RHB cuts construction sector cumulative earnings estimates but maintains 'overweight' call

TheEdge Thu, Sep 09, 2021 10:28am - 8 months View Original

KUALA LUMPUR (Sept 9): RHB Investment Bank has cut its construction sector cumulative earnings estimates for 2021 and 2022 by 10% and 2% respectively to reflect slower construction activities amid multiple site closures.

However, the research house maintained its "overweight" call on the construction sector as the roll-outs of the 12th Malaysia Plan (12MP) and Budget 2022 are expected to boost the sector.

RHB Investment Bank analysts Muhammad Danial Abd Razak and Eddy Do Wey Qing said in a note today that overall, the construction sector's second quarter of 2021 (2Q21) results came in below their expectations.

Pintaras Jaya Bhd was the only beat, underpinned by higher progress billings recognised in Singapore, they noted.

“In general, progress on construction sites was slower than expected due to the residual impact of multiple site closures,” they said.  

Factoring this in, they revisited their earnings forecasts and made certain adjustments to reflect the near-term risks.

“Consequently, [our] cumulative earnings for 2021F and 2022F (forecasts) were cut by 10% and 2% [respectively],” they said.

Nonetheless, they expect key operational activities to normalise within 4Q21.

They also noted that the roll-outs of the 12MP (Sept 27) and Budget 2022 (tentatively on Oct 29) are near.

“Over in the next 100 days, the government’s goal is clear as it looks to adopt key strategies to put the economy back on track,” they said.

They also noted that the increasing vaccination rate should further substantiate the reopening of more economic sectors, allowing overall business activities (including construction) to regain strength.

They also said the full reopening of the construction sector looks possible by October.

“Companies have been guiding for better overall performances in 4Q21. This is especially as the government has allowed industry capacity to go up to 100%,” they said.

According to them, the government recently set multi-tier conditions for construction companies to allow them to increase operational capacity from 60% previously.

This is only possible by getting more workers vaccinated, they noted.

“With the vaccination rate reaching higher levels on a daily basis, it is likely that construction firms are able to inoculate at least 80% of their site workers by next month,” they said.

They also said construction activities should be able to be fully ramped up in 2022.

“Upon a full sector reopening, productivity should improve in tandem with the easing restrictions. This should come with exciting developments in the reactivation of the Mass Rapid Transit Line 3 (MRT 3) project, in our view,” they said.  

They expect work to commence next year, benefiting contractors along the supply chain.

“The increase in productivity should also help contractors to improve their margins from a low base as they benefit from higher economies of scale,” they said.

Their top picks in the sector are Gamuda Bhd (target price [TP]: RM3.86) and Kerjaya Prospek Group Bhd (TP: RM1.62).

“Overall, we believe they have supportive catalysts to buffer the near-term risks and may come out of the pandemic stronger due to their supportive order books,” the duo said.

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