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Construction to stamp its mark post Covid-19 recovery


The construction sector will make its mark as a significant major contributor to Malaysia’s overall economic recovery from the Covid-19 pandemic, Kenanga Research says. Pix courtesy of Pexels.com

KUALA LUMPUR: The construction sector will make its mark as a significant major contributor to Malaysia's overall economic recovery from the Covid-19 pandemic, Kenanga Research said.


Drawing experience from historical lessons, Kenanga Research is convinced that construction would be a key lever for the government to kick start the recovery.


"It is a matter of time before the sector will undergo a blanket re-rating," said the firm today, maintaining its "overweight" call on the sector.


"We believe the government will gradually pivot their focus onto economic recovery measures for the mid to long-term horizon.

"Therefore, we feel timing is now right to start accumulating construction names in anticipation for a rally," it added.


Kenanga Research reckons that the rally would come somewhere in late August to November.


This is after the weak second quarter financial year 2020 reporting season is being flushed out and the market begins to pivot their attention onto goodies from 2021 Budget and the 12 potential upside of 30 per cent from current levels.


While it believes the sector would imminently undergo a sector-wide rerating, Kenanga Research said earnings delivery was paramount to keep the rally sustainable.


Hence, the firm said it preferred companies with the execution track record to effectively turn order-book into earnings.


"We acknowledge that the Malaysian construction space is a cyclical sector at the end of the day. With companies having order-books of quantum in the billions, it is just unsustainable to achieve continuous order-book growth to support earnings.


"Thus, the rally will eventually taper off. Case in point, KLCON Index has been range bound for the last two decades," it said.


Kenanga Research said construction would remain the most effective conduit for the government to unleash their fiscal stimulus which boasts high multiplier effect, given the huge supply chain.


In order to avoid a downward spiral in the economy, the firm feels the government can focus on expediting existing projects such as ECRL and LRT3, and fire up new projects.


"In times like these where every nation will be registering a higher deficit, we believe rating agencies will allow fiscal discipline to be loosened.


"Fiscal reforms can take a backseat as growth in the economy should be the priority.


Therefore, it would be an opportune time for the government to chart the course for the nation's next mega projects i.e. MRT3, HSR," it added.



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