Major construction projects awaiting government decision

4/5/2009 The Star
Edited

THERE is urgency for a heightened pace of construction works flowing to keep at least one economic component pumping hard. With a new Cabinet line-up and by-elections (almost) out-of-the-way, we anticipate a refocus on development priorities.

Of the RM7bil first fiscal stimulus unveiled in November, only RM2.4bil worth of projects was awarded as at April 17. Of this, RM350mil has been spent; the balance is still “work-in-progress”.

Plans are for a total RM5.2bil worth of projects to be awarded by June, and a full roll-out of RM7bil (38,000 projects) by August. Of the RM7bil first fiscal stimulus, we estimate the construction component to be RM4.6bil.

As for the RM60bil mini-Budget unveiled in March, RM15bil is fiscal allocation (RM10bil development, RM5bil operating), direct from the government’s coffers. The RM60bil mini-Budget offers RM11bil worth of works; the largest being the RM2bil LCCT, KLIA.

The 9MP, too, is not forgotten. Of the RM230bil 9MP allocation for development for 2006-2010, only RM119bil has been spent as at end-2008, implying a potential RM111bil spending over 2009-2010 assuming the RM230bil is maintained.

For 2009, government’s gross development spending was projected at RM56.7bil (2008: RM42.8bil) before imputing the stimulus allocations. Including the second fiscal stimulus package, this would reach RM60bil in 2010.

We expect a heightened pace of construction tenders and awards from mid-2009. Major projects awaiting decisions are the Pahang-Selangor water transfer (decided oredi May 2009, Shimizu-Nishimatsu-IJM-UEM consortium awarded the job - Ed) and Klang Valley LRT system. The government has clearly no problem in fund raising, without the distraction of a banking crisis, as in 1998.

Year-to-date, RM30.5bil worth of MGS-GIS has been issued, out of a total RM95bil estimated for 2009. Of the RM95bil, RM42bil is for refinancing while the balance RM53bil is new financing.
The RM30.5bil issued is already more than half of the official projected budget deficit of RM53.8bil for 2009. This should be sufficient for the immediate roll-out of construction packages.

More focus on east Malaysia
Higher allocations under the 9MP and second fiscal stimulus, and the new Cabinet line-up imply “urgency” for more infrastructure development in Sabah and Sarawak.
Of the RM10bil development allocation under the RM60bil mini-Budget, Sarawak has the highest allocation of RM1.2bil while Sabah’s allocation was the sixth largest. Sarawak Corridor of Renewable Energy (Score) and Sabah Development Corridor remain very relevant and we expect more construction works in Sabah and Sarawak.

We expect more positive news flow benefiting construction by mid-2009, with more mid-sized contracts of less than RM500mil each to lead the momentum for construction.
Top on the list of potential beneficiaries are contractors with long experience, excellent delivery track records and strong balance sheets to carry the weight of a turnkey contractor.
Our top picks for contractors of mid-sized projects are WCT and IJM Corp, which we upgraded to “buy” last week. Increasing momentum of works at Sarawak should benefit home-grown contractors like Hock Seng Lee (HSL) and Naim Cendera.We expect HSL, (outstanding order book of RM1.27bil), to record strong earnings growth in 2009 (+>20% year-on-year), while further job wins should sustain earnings into 2010.We upgrade HSL to a “buy”.
We also expect Loh & Loh to gain from water- and energy-related works under Score.
WCT and IJM Corp, which have built up good track records, could benefit in Sabah.
Gamuda remains known for its construction ability in mega projects – SSP3 in 1999 and SMART in 2002 - and we think Gamuda may play a lead role in the Klang Valley LRT works.

However, it is a little early to review our “hold” call on the stock.
Our TP is raised after removing a 20% discount to our unchanged RNAV of RM2.50/sh.

Govt ramping up construction sector

Tuesday April 14, 2009
Govt ramping up construction sector
By IZWAN IDRIS

PETALING JAYA: The construction industry, which saw a dearth of jobs last year, has caught a glimpse of up-coming jobs from the stimulus spending this year.

This will be counter-cyclical in the sense that while the industry shrank last year, it may expand in a year of economic slowdown as the Government ramps up construction to offset negative growth in other sectors.

Analysts sense this impending recovery.

CIMB Research last week said IJM Corp Bhd was eyeing nine major contracts worth at least RM9.4bil in total.Eight are domestic projects. These include
the job to build a hospital in Putrajaya,
two packages involving the Pahang-Selangor interstate water project,
the West Coast Expressway,
the new low-cost carrier terminal in Sepang,
work related to the Penang Second Bridge project and
upcoming contracts to extend the existing two light rail transit (LRT) lines in the Klang Valley.
Contracts to extend the existing two LRT lines in the Klang Valley are among the upcoming projects.

All these contracts are in various stages of negotiations, and tenders for some of these projects are yet to be called. Other companies were also reported to be in the running for some of the projects being targeted by IJM. The prospective IJM job list gave some insight into the value of big domestic construction works that are in the pipeline. Recently, WCT Bhd was reported to be in the process of finalising some RM500mil worth of jobs in Sabah.

There is also talk about a new LRT line being planned to link Kota Damansara and Cheras that is estimated to cost RM30bil. This project, like some of the other upcoming jobs, should attract fierce bidding from the big contractors when it becomes available.

While the prospect of big projects coming in has fuelled investors’ imagination in the past weeks, an analyst at RHB Research Institute has a more sober view of the sector.“Generally, we continue to find it difficult to be positive on the sector over the short term,’’ the firm said in report yesterday. The key reasons for its lack of enthusiasm centred on the argument that the projects planned under the two stimulus packages were mostly small in size. The lack of availability of funds at the right price also remained a major hurdle for most private financing initiatives to take off.

RHB Research said that as focus shifted to rolling out projects under the two stimulus packages, it “believed certain highly anticipated mega projects” under the Ninth Malaysian Plan might be put on the backburner, or postponed to the 10th Malaysia Plan. The firm, however, acknowledged increased investors’ appetite for risk, and had assigned higher target prices for construction stocks under its coverage to reflect this. Fund managers are aware of this mood of recovery. Hence, share prices of the big contractors which have been rising, continued to edge higher yesterday, as they shrugged off concerns that prices of counters like IJM, Gamuda Bhd and Malaysian Resources Corp Bhd (MRCB) might have gone up too fast and too soon.
A key factor in driving up investors’ buying binge in recent weeks was high expectation that the pump-priming agenda of the new administration of Prime Minister Datuk Seri Najib Tun Razak would result in increased big construction job flow in the coming months.

Analysts, however, seem to prefer to wait and see if some of these “highly anticipated” projects materialise first. “We maintain our ‘neutral’ call (on the construction sector) as there is a lack of re-rating catalysts in sight,’’ ECM Libra Investment Research said in an update. “Key risks going forward include below-trend order book replenishment as well as implementation risks.’’
But investors are already betting that companies like IJM, Gamuda, MRCB and WCT will emerge winners.

IJM’s share price climbed six sen to RM4.70 yesterday – its highest level since mid-September last year. The stock has risen 67% since the start of the year, but is still a long way off its peak of RM8.82 reached in February 2007. Shares in Gamuda and MRCB advanced yesterday, with both stocks now chalking up year-to-date gains of 29% and 45% respectively. WCT, whose shares were clobbered in January, has also recovered strongly.

Dubai axes racecourse deal with WCT Engr

Dubai axes racecourse deal with WCT Engr
Published: 2009/01/06

DUBAI: Dubai’s Meydan LLC said yesterday it has cancelled a racecourse construction deal with Malaysian construction firm WCT Engineering Bhd and local firm Arabtec.A Meydan statement did not give a value for the deal, but WCT said in 2007 that its 50-50 joint venture with Arabtec had won a US$1.3 billion contract to build the racecourse in Dubai.The contract was cancelled “because of non-adherence to the agreed time schedule for construction,” Meydan said in the statement.Arabtec officials could not be reached for comment.


Meydan is taking steps to commission other companies to complete the racecourse by 2010, when it is to be opened with the Dubai World Cup horse race, the statement said.The racecourse is designed to include a 1 km (0.6 mile) grandstand and capacity for up to 60,000 spectators.Because of the global financial crisis and falling construction costs, Gulf Arab countries have cut back on some large projects or tried to renegotiate costs with contractors. - Reuters

HwangDBS positive on construction sector

HwangDBS positive on construction sector
Published: 2009/01/05

HwangDBS Vickers expects bigger construction players with good execution track records such as IJM Corp and WCT to emerge as winners given the increased focus on timely delivery

HWANGDBS Vickers Research Sdn Bhd said it sees the outlook for the local construction sector in 2009 as positive, boosted by the government's expenditure on infrastructure projects.The high-profile jobs include extension of the Klang Valley light rail transit system and the inter-state water transfer."We expect 2009 to be the year for the government to play catch-up (after 2008's more muted allocation of construction projects) as pump priming efforts appear vital to ensure its internal Gross Domestic Product (GDP) growth target of 3.5 per cent is met and the economy does not slip into recession," it wrote in its market focus report recently."The (government's) development expenditure of RM53.7 billion for 2009 is a hefty 16 per cent increase from 2008 estimates of RM46.3 billion. An additional RM7 billion was announced as part of a stimulus package in November," it said.

The foreign research firm also sees improved outlook for the construction sector's margins, as building material prices have corrected sharply.The price of steel bars at RM1,900 per tonne has dropped from a peak of above RM4,000 per tonne."When material prices were at the peak, the government planned to delay some projects given the higher cost. The lower cost now will allow more projects to be implemented," it said.HwangDBS Vickers said it expects bigger construction players with good execution track records such as IJM Corp Bhd and WCT Bhd to emerge as winners given the increased focus on timely delivery.

"Apart from potential government jobs, we believe IJM will be eyeing projects in India, the Middle East and private sector jobs in Malaysia. For WCT, we expect the group to leverage on their Middle East presence for order book replenishment," it said.Meanwhile, its 12-month target for the Kuala Lumpur Composite Index is 950 points, based on 12 times 2010 earnings."

In the near term, concerns about growth may continue to weigh on the market. In this environment, we like stocks with relatively resilient dividend flows." Utility-type/concession earnings at YTL Power Bhd, PLUS Expressway Bhd and Lingkaran Trans Kota Holdings Bhd should sustain high-dividend payouts," it added.For 2008 and 2009, DBS expects the country's GDP to grow by 5.5 per cent and 3.3 per cent respectively. This estimate factors in another 50 basis points cut in the Bank Negara Malaysia's policy rate to 2.75 per cent by end first quarter of 2009.

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.