Contractors brace for more price hikes

Friday July 11, 2008
Contractors brace for more price hikes
By JOSEPH CHIN The STAR

Building materials prices expected to rise 5%-10%
PETALING JAYA: Contractors, who have seen building material costs surge by an average 25% since January, are bracing for another round of price hikes, this time from the higher electricity tariffs which came into effect on July 1.

Master Builders Association of Malaysia (MBAM) secretary-general Yap Yoke Keong expected prices of building materials, including steel bars, cement and roof tiles, to rise by 5% to 10%. “It is a very critical stage for contractors,” he told StarBiz.

Contractors were already reeling from cost pressures in the form of spiralling building material prices and the knock-on effects of steep fuel price, he said, adding that the higher tariffs would put additional pressure on them.
Electricity tariffs rose by up to 18% for households and an average 26% for some commercial and industry users with effect from this month. Bank Negara expects the consumer price index to exceed 6% in June, following the adjustment in petrol prices by 40.6% and diesel prices by 63.3%.

Yap said some contractors had asked property developers to consider varying their contracts to allow for fluctuations in prices.”At the moment, there are a lot of discussions with developers and contractors, as such variations are not in the contracts. If the developers engage new contractors, they would also have to factor in the higher material prices,” he said.
Meanwhile, the Malay Contractors Association Malaysia is more pessimistic. Its president Datuk Roslan Awang Chik expects escalating prices to force some its 7,500 members, who mainly handle Government contracts, to close shop by the year-end. Recently, 200 contractors nationwide returned letters of award for projects to the Government. Most of them did not want to proceed with the contracts while others were slowing down or asking for mutual termination, he said.

“Contractors are finding it difficult to fulfil the terms of the contracts due to escalating prices. They have asked for variation order of prices from the Government. The average variation would be 25% to 30% of the original contract sum,” Roslan told StarBiz.

The Government had increased the allocation for the Ninth Malaysia Plan by RM30bil to RM230bil, partly due to more expensive building materials and also to finance additional developmental objectives.At end-200 7, about RM70bil had already been spent, leaving RM160bil for fiscal pump-priming from 2008 to 2010, or an average RM53.33bil a year.

RAM Ratings expects the construction industry’s growth prospects and profit margins for the remainder of 2008 and 2009 “to remain challenged” due to cost pressures from surging prices of building materials and higher fuel costs. “As building materials account for some 40% to 50% of their total costs, construction players with less leveraged balance sheets and more diversified businesses are expected to be able to better withstand the near-term cost pressures,” it said.
Larger construction companies with established track records in foreign countries would have a better chance of securing new projects abroad, despite intense competition and various operational and macro-economic risks, the ratings agency said.

CIMB Equities Research downgraded the construction sector from “neutral” to “underweight” as the continued rise in raw material costs would squeeze contractors’ margins and might lead to delays and even abandonment of construction projects. “Margins could face further compression from a potential move away from direct negotiated contracts to more open tenders. This scenario could be exacerbated by higher transport costs stemming from the fuel and electricity tariff increase,” it said. It also said share prices of construction stocks should remain depressed in the absence of any major upward re-rating catalysts even though the stocks in its coverage had fallen by 27% on average since the general election.
It said share prices were likely to remain depressed. Sentiment aside, the likelihood of margin compression filtering through more swiftly and intensely than expected was also a concern, coupled with further price escalation for steel and cement, which should stay on an upward trend as long as growth in steel consumption was supported by Brazil, Russia, India and China.

AmResearch Sdn Bhd expects more earnings downgrades by the market in the coming quarters, as margin concerns would continue to increase due to a step-up in raw material and energy costs. “Prices of steel surged 45% in six months whilst the liberalisation of cement prices (up 17% since early June) would put further pressure on construction costs,” it said. However, it is positive on companies like WCT Bhd and Zelan Bhd, but less enthusiastic about IJM Corp Bhd and Gamuda Bhd. AmResearch raised the net profit forecast for WCT for the financial year ending Dec 31, 2008 (FY08) by 5% to RM202mil to factor in an additional RM800mil worth of works for the Abu Dhabi Formula One project. However, it trimmed the net profit for FY09 and FY10 by 6%-7% to RM260mil and RM283mil respectively on a one to two percentage points cut in construction margins to reflect rising input and fuel costs and lower new contract assumptions of RM1.5bil for 2009 compared with RM2.5bil previously.

On Zelan, AmResearch said that 58% to 92% of the company’s construction earnings for the financial years ending March 31, 2009 (FY09) to FY11 were based on locked-in contracts.
It added that 93% of Zelan’s outstanding order book of RM3.9bil were derived from overseas contracts. Of this, 65% consisted of higher value engineering, procurement and construction (EPC) power plant and water desalination jobs.

“This insulates Zelan against any slowdown in domestic infrastructure spending,” it said, adding that Zelan was on track to transform itself into a global EPC player, after delivering RM3bil worth of power plant jobs in India, Indonesia and the Middle East in just three years.