KUALA LUMPUR: Construction margin growth is expected to be flattish between six to eight per cent, on average at pretax level, pressured by ongoing elevated construction cost.
Going into the second half of 2023 (2H23), Public Investment Bank expects the sector to gain traction from increased news flow, in addition to the rollout of mega infrastructure and sizeable development projects namely the Mass Rapid Transit 3 (MRT3), Bayan Lepas Light Rail Transit (LRT), Penang South Islands (PSI) Island A, Subang & Penang airport extension as well as numerous projects allocated in Budget 2023.
On the value of work done, it noted an increase of 9.4 per cent year-on-year (YoY) from RM29.5 billion in the first quarter of 2023 (Q1 2023).
"Albeit registering higher growth from the previous year, value of work done is still 13.8 per cent lower as compared to pre-pandemic levels (ie. RM35 billion in Q1 2019). "Overall sector activity is still soft as project rollouts are lacking, though the current quarter is likely to have seen a lower amount of work done due to fewer working days as a result of more holidays."
Project value awarded as of June 6, dropped 22.8 per cent YoY from 1H22, led by overseas projects followed by public and domestic private projects.
It said this could signify weakness in the rollout of high-value projects since listed contractors are not required to announce transactions of less than five per cent of net assets.
Overseas projects suffered the steepest decline from RM8.2 billion awarded in 1H22 to RM 291 million awarded in 1H23.
It added that overall construction earnings came in below the firm's expectations.
"All companies under our coverage, except Gamuda, reported weaker construction earnings (-4.6 per cent quarter-on-quarter, on average), attributable to slower progress billings during the quarter. "
"That said, construction earnings are historically low in the first quarter of the year as a result of lower productivity," it noted.
The firm maintained an "Overweight" call on the sector noting that sector headwinds such as volatile building materials prices and labour shortage have dissipated though continuously challenged by still-elevated key materials (cement and steel) prices.
"We believe sector earnings will perform better in the coming quarters given, construction cost has stabilised in addition to increased work efficiencies which lead to higher progress billings."
"Progress billings from newer projects will also help strengthen margins as newer projects tend to fetch better margins compared to old projects due to the easing in key materials prices," it said. -end-