I’ll will be challenging for construction firms to replenish order books: Affin Hwang

PETALING JAYA: Construction companies will find it difficult to replenish their order books in 2020, as a rising risk of economic slowdown and a tighter federal government budget could lead to a cut in development expenditure.

A report by Affin Hwang Capital Research said it expects lower infrastructure spending in 2020 as implementation of new large-scale projects could be deferred.

It stated that it is uncertain whether recently appointed Works Minister Datuk Seri Fadillah Yusof will review policies on the award of new public sector contracts adopted by the previous government and reprioritise projects to be implemented, which could cause delays in contract awards.

“Fadillah said that the Pan Borneo Highway will continue. We view this positively as changing the implementation approach again would cause further delays in completing the project,” it said.

In addition, the sharp fall in the Brent crude oil price will reduce the federal government’s revenue from oil-related sources, which contributes about 30.8% of total revenue.

“The government may reduce development expenditure to mitigate the impact on the federal government deficit, which could lead to lower infrastructure spending,” Affin Hwang said.

As a result, the research house said it would be cutting earnings forecasts for construction companies under its coverage to reflect lower assumptions of new contract wins and weaker property sales.

“We now expect sector core earnings per share (EPS) to grow 2% year-on-year (yoy) in 2020 and contract 5% in 2021. Our sector 2020 core EPS growth was 13% yoy in early-2020 and 8% yoy before this round of earnings cuts. Our sector 2021 core EPS growth was 4% yoy before this round of earnings cuts,” it said.

Affin Hwang also revised its target prices for most of the construction stocks under its coverage to reflect lower revalued net asset value (RNAV) estimates and higher discounts to RNAV.

The research house highlighted that the share price discounts to RNAV were at the widest during periods of political and federal government deficit concerns in 2015 (1MDB issue) and 2018 (GE14).

For the sector, Affin Hwang is maintaining its underweight call, downgrading IJM Bhd to a sell from hold with a reduced target price (TP) of RM1.58.

“We cut our core EPS forecasts by 16% in FY21-22 to reflect lower crude palm oil price assumptions and lower new construction contract wins. We downgrade Gabungan AQRS Bhd to hold from buy with a lower TP of RM1.10.

“(Our) sector top buys are Sunway Construction Group Bhd, AME Elite Consortium Bhd and Taliworks Corp Bhd.”

source https://www.thesundaily.my/business/i-ll-will-be-challenging-for-construction-firms-to-replenish-order-books-affin-hwang-XI2129145