Construction Monthly Review: November 2008

December 2, 2008 at 4:19 am Leave a comment

• Minimal impact from the economic stabilisation plan.
The construction sector will get a much needed booster from the economic stabilisation plan as out of the RM7bn additional budget allocation, RM4.1bn is in the form of housing and infrastructure development. However, the main beneficiaries of this pump-priming initiative are likely to be the small contractors. Bigger players will only benefit from more complex jobs such as the LRT line extension project. Import duty on cement has also been abolished while AP requirement for steel import has been waived. Following this development as well as further weakness of international steel bars prices, domestic steel players slashed steel bars prices from RM2,800 to RM2,000 per tonne late last month.
• In the news.
Bad news still hogged the limelight in the construction sector. Among the notable ones are (1) news on the shelving of West Coast Expressway, (2) Gamuda and MMC being sued by a sub-contractor, (3) the exit of Albert Chang from Zelan, and (4) financing for Pahang-Selangor Raw Water Transfer project from Japan Bank for International Cooperation is still not secured yet.
On the bright side, the Penang second bridge project will now proceed after UEM Builders agreed to accept the contract for the superstructure for a revised contract sum of RM1.55bn.
• Contracts awarded.
New contracts awarded last month amounted to RM3.3bn. Again, there were few local jobs as overseas jobs account for RM3.0bn of the sum. WCT was the main beneficiary with RM1.4bn worth of new jobs.
• Another uninspiring quarterly result.
3Q08 reporting season was pretty much the same as the last quarter with results generally below expectations. Construction players were still reeling from the effect of high building materials prices and delay in construction progress.
• Maintain UNDERWEIGHT.

Share price performance

Construction stocks, in general, edged higher last month as stocks recovered from losses sustained in October. On notable filings by major shareholders last month, Employees Provident Fund emerged as a major shareholder in Gamuda with 5.8% interest while Platinum Investment Management increased its stake from 8.6% to 8.9%. Employees Provident Fund also increased its existing 21.5% interest in IJM Corporation to 21.9% last month. However, IJM finally saw one of its foreign investors, Emerging Markets Growth Fund, ceasing to be a major shareholder after its shareholding fell below the 5% threshold following heavy sell down since end October.

Minimal impact from the economic stabilisation plan for big players
After experiencing sharp increase in construction costs and declining domestic jobs flow, the construction sector will get a much needed booster from the economic stabilisation plan as out of the RM7bn additional budget allocation, RM4.1bn is in the form of housing and infrastructure development. However, the main beneficiaries of this pump-priming initiative are likely to be the small contractors which have been the hardest hit group as compared to the big listed contractors which continue to benefit from overseas jobs. Some jobs may still flow to the smaller cap listed contractors such as Ahmad Zaki (AZR MK, not rated) and
TRC Synergy (TRC MK, not rated) which have significant exposure to government jobs. Although most of the infrastructure spending under the pump-priming initiative will benefit the smaller players, more complex jobs such as the construction of LRT will benefit the bigger players such as IJM and Gamuda instead. Sunway Holdings may also benefit from the demand for quarry aggregates used in road construction.
The government will also ensure that a major portion of its procurements are made through open tenders and closed tenders to further enhance its procurement process, make it more transparent and get value for money. In this regard, bigger construction players which are competitive may benefit.
To further alleviate the impact of rising construction cost, the government has abolished import duties for cement and long iron and steel products while approve permit (AP) for long iron and steel products will be waived for construction sector. This measure may at last resolve the complaints of many construction players of not being able to import steel bars despite the abolishment of import duty on certain steel products on May 12 as the Customs still require importers to procure AP.
Domestic steel bars which are currently priced above international export price may slide further in the coming months. Just last week alone, steel players have succumbed to pressures from its customers and slashed steel bars prices substantially from about RM2,800 to RM2,000 per tonne. This is welcomed news to construction players which have been plagued by exceptionally high building materials costs over the past year or so. While cement may now be imported without import duty, its impact on domestic cement prices is expected to be more measured as compared to steel bars. This is due to relatively high transport cost vis-à-vis the product cost as well as the limited shelf life of cement.

Notable construction news…the good ones
• The Penang government will retract its stop-work order on the electrified double-track railway line in the state soon after all problems which cropped up due to the project implementation have been resolved. State Agricultural and Agro-based Industry, Rural Development and Flood Mitigation Committee chairman Law Choo Kiang said the move would also be taken following action taken by the project contractor, MMC Corporation (MMC MK, not rated) – Gamuda Bhd, in meeting the specifications as stipulated in the project.
• UEM Builders Bhd (UEMB MK, delisted) has on 13 November 2008 accepted the offer from Jambatan Kedua Sdn Bhd to undertake the construction of the superstructure portion of the Penang second bridge following a revision in the contract sum from RM1.3bn to RM1.55bn.
…and the bad ones
• The media reported that the RM3.1bn West Coast Expressway project has been shelved and might undergo a new tender as terms of the deal could not be finalised within a 15-month time-frame. However, Kumpulan Europlus (KEUR MK, not rated), which has a 60% stake in the highway concessionaire, clarified that it has not been formally informed by the government and will be seeking clarification on the matter. IJM Corporation has a 25% stake in Kumpulan Europlus.
• Gamuda is embroiled in a contract dispute with a sub-contractor for the SMART project, which was undertaken on a joint venture basis with MMC Corporation. The sub-contractor, Wayss & Freytag (Malaysia) Sdn Bhd, is now suing Gamuda and MMC for the sum of RM102.4m. Based on announcements to Bursa Malaysia, both Gamuda and MMC opined that they have a good case against the sub-contractor. The impact on Gamuda’s valuation is minimal in the even it loses the case.
• Zelan’s (ZELN MK, not rated) shares took a tumble following the company’s announcement that the employment contract of its chief executive officer Albert Chang will not be renewed when it lapses on 31 Jan 2009. Albert Chang has since disposed of most of his shares. It is widely believed that following the departure of Albert Chang, MMC Corporation will have management control of Zelan since MMC is the largest
shareholder with 39% stake in Zelan. While speculation has been rife that MMC may either inject MMC Engineering Group Bhd into Zelan or to launch a take-over offer to take Zelan private, MMC has formally refuted these speculations.
• Zelan Bhd has terminated its proposed 70:30 joint venture with Al-Ambia Sdn Bhd for the design and construction of the RM805m Meena Plaza project in Abu Dhabi, United Arab Emirates. As a result of the joint venture termination, the Meena Plaza venture would be transferred to Zelan where it would continue to perform and execute the project to completion. It is not known why the joint venture was terminated.
• Funding for the Pahang-Selangor Interstate Raw Water Transfer Project has not been secured as of todate as the government is still negotiating with Japan Bank for International Cooperation (JBIC) on the soft loan to finance the project. According to Deputy Energy, Water and Communications Minister Datuk Joseph Salang Gandum, should the government failed to procure the soft loan; the project will still go ahead as
the government had backup plans.

Contracts awarded
New contracts worth RM3.3bn were awarded last month, of which RM3.0bn worth of jobs were from overseas, in particular Abu Dhabi. WCT was the main beneficiary with RM1.4bn worth of new jobs.

Comments:
3Q08 reporting season was pretty much the same as the last quarter. Construction players were still reeling from the effect of high building materials prices and delay in construction progress.

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Banking Monthly Review : November 2008 Economics – Malaysia: The Economy Cooled Off Substantially In 3Q08

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