Analysts are generally upbeat on the construction sector this year, but have expressed some concern on several issues such as the speed of execution and implementation of contracts, the increase in raw material costs, further appreciation of the ringgit as well as oil prices, which may erode profit margins.
An OSK Research analyst said while the construction sector was more bullish than last year, especially with the anticipated roll-out of many sizeable government contracts such as the RM36bil Kuala Lumpur Mass Rapid Transit (MRT) for the greater KL region and the RM5bil Warisan Merdeka development, there was a need to monitor cost.
He said along with the euphoria of more contracts and larger order books, developers and contractors should also be cautious about cost overruns.
“Developers and contractors may be able to replenish their order books this year but they should be careful about rising costs of doing business, especially players in the second or third tier,” he told StarBiz yesterday.
The analyst said in 2008, many property developers and contractors were caught having to deliver on contracts when raw materials and oil prices hit record highs, which eroded their margins or incurred losses.
He, however, conceded that the situation was slightly different now as the slew of projects was supported by the Government under the Economic Transformation Programme and the players should be on a “firmer footing.”
According to an OSK Research report, the value of domestic contracts awarded in the fourth quarter last year totalled RM4.7bil (up 49% year-on-year, down 16% quarter-on-quarter).
For the full year 2010, this amounted to RM15.6bil (up 56%), which beat the research house's RM13bil target. Based on the report, it conservatively estimated domestic contract awards to reach RM18bil this year.
Given the possibility of an early general election this year, the research house envisaged the momentum of positive news flow to accelerate further and rerating on valuations, according to the report.
OSK Research, which has an “overweight” on the construction sector, has Gamuda Bhd as its top pick for large caps and Ahmad Zaki Resources Bhd for small caps.
An analyst with CLSA Securities said there were concerns about rising costs of projects this year that could affect profit margins of players but the research house believed that as most of these projects were mandated or driven by the Government, they should be relatively safe.
“We don't see rising costs of raw materials as a major issue affecting margins as they are likely to be factored in at the bidding price,” he said.
However, the analyst said, if there was a sudden and marked increase in prices of raw materials, then it could be a concern on profitability of the projects.
An analyst with RHB Research said while prices of raw materials for the construction sector and fuel had risen, they had so far increased fairly gradually.
“So long as the pace of increase remains gradual, cost should not be an issue,” he noted.
He, however, believed that the timely execution and implementation of these major government projects was vital.
“The start of the MRT for greater KL is slated to kick off in July. We need to see this happen. So far there's only been talk,” he said.
He said confidence that the projects would materialise was fuelled by the fact that the Government would be using very established and proven property developers with good track records such as Gamuda and IJM Corp Bhd.
Another property analyst said late start and delivery of projects had often been the reason for the major cost overruns in some of the past government and private projects.
“Naturally, if a project is not delivered on time, the costs will go up and so will the costs of raw materials generally,” he said