Margins intact

Multiple issues: An ongoing construction project in Kuala Lumpur. Construction players faced the challenges of dwindling order books and uncertainty over raw material prices early this year.

Construction companies, which have to deal with issues relating to securing new projects, are seeing their order books building up again although at a slower pace.

The companies had faced dwindling order books and uncertainty over raw material prices – factors that affected their margins early this year.

A contractor for high-rise buildings said the price of steel, a major raw material used in construction, had come down by 15% currently compared with a year ago.

“Last year, the price of steel was RM2,200 per tonne,” said the contractor.

According to Seacera Group Bhd group managing director Zulkarnin Ariffin the price of steel has been on a downtrend due to the overall weak global economy which resulted in lower demand for the commodity.

Apart from steel, other key raw materials used for construction of structures are cement, concrete and sand aggregates. Together, the raw materials form about 30% of cost.

Zulkarnin said that the prices of cement had also remained stable.

“Cement is a price-controlled item in Malaysia, so prices have remained stable”.

However, Zulkarnin pointed out that construction firms have not benefitted from the falling raw material prices.

“The impact of falling raw material prices, if any, is not being felt by construction firms as projects are coming in slower than before,” said Zulkarnin.

Another contractor said, in general, raw material prices had not come down much.

“Even if there has been a price downtrend, the effect has been negated by an increase in prices of machinery and other costs, so any positive impact on margins is minimal,” he said, adding that the prices for items such as lifts, imported sanitary wares and pumps have gone up due to the depreciating ringgit against the US dollar.

Meanwhile, research houses said revenues of companies in the construction sector are looking positive and their order books are expected to increase in the coming months.

The prospects of WCT Holdings Bhd completing its latest project called MyTown in Kuala Lumpur was a positive sign as the project was on schedule with a progress rate at 27.6%.

“Furthermore, we take comfort on the strong possibility of WCT winning additional packages for the construction of three condominium towers above the MyTown complex. The additional packages, if clinched, will help our next year’s order book replenishment assumption of RM1bil and increase the overall project contribution for financial year 2016 estimate,” said MIDF Research, maintaining its “buy” call on WCT with a target price of RM1.70, the equivalent of a price earnings ratio of 11.3 times. WCT had an outstanding construction orderbook of RM1.09bil.

On the other hand, Sunway Construction Group Bhd’s acceptance of the letter of award to build a RM174.5mil residential project in Pulai, Johor, had increased the company’s order book to RM4.77bil. HLIB Research said the company was merely making up for last year’s shortfall of RM763mil rather than propel earnings growth.

“Given its strong track record among the various government-related entities such as Prasarana, MRT Corp, Putrajaya Holdings and KLCC Group, Sunway Construction is in a favoured position to ride on the impending construction upcycle under the 11th Malaysia Plan,” HLIB Research said.

“In terms of track record, it was the only contractor with experience in all three major public transport projects – light rapid transit, mass rapid transit and bus rapid transit,” said research house, maintaining its “hold” call on Sunway Construction with a target price raised slightly to RM1.35.

For Affin Hwang Capital Research, IJM Corp Bhd is favoured to replenish its order book of RM7bil.

“It is a preferred bidder in several upcoming large infrastructure and bidding projects due to its strong track record,” Affin Hwang Capital Research said.

IJM had started work on the West Coast Expressway packages worth RM2.8bil since August, giving its outstanding order book of RM7bil the drive for construction earnings growth in FY17.

“As one of the best performing contractors for Klang Valley MRT Line 1 (MRT1), IJM is in a good position to clinch at least one of the 10 above-ground civil work packages for MRT2, which will call for tender at end-October,” it said. - By CHERYL POO (The Star)

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