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Domestic construction contract awards slump in Q3

PETALING JAYA: The Malaysian construction sector saw an 81% year-on-year (yoy) slump in domestic contract awards in the third quarter (Q3) of 2019 to RM1.1 billion, bringing the nine-month sum to RM9.2 billion or a 36% decline compared with the corresponding period of 2018.

And now, the sector is pinning hopes on Budget 2020 with potential announcements on infrastructure projects, possibly the Johor Baru-Singapore Rapid Transit System Link (RTS), MRT3 and Kuala Lumpur-Singapore High Speed Rail (HSR), according to HLIB Research.

Elsewhere, contracts that are expected to be rolled out are six bridge deals with a combined value of RM2.4 billion under the Sarawak Coastal Road.

“Other material developments related to the sector are the ramp-up of LRT3 project (RM16 billion) in Q4 19 and potential signing of a PDP (project delivery partner) agreement for the Penang Transport Master Plan by year-end (RM24 billion).”

The research house said the decline in contract awards was due to smaller average contract size of RM90 million (-22% quarter on quarter, -59% year on year) compounded by contraction in number of contracts awarded which totalled 12 in the third quarter of 2019.

Infrastructure jobs made up 31% of domestic contracts for the nine-month 2019 period with the balance from building jobs. The decline in contract value and lower proportion of infrastructure works was attributable mainly to holding back or downsizing of infrastructure projects post 14th General Election (GE14).

“Year to date, all Sarawak-related contracts are infrastructure works which testify to our view that momentum of project flows in Sarawak is gaining traction as the next state elections must be held before September 2021. Infrastructure contracts that are expected to roll out in Q4 19 are six bridge contracts with combined value of RM2.4 billion under Sarawak Coastal Road,” said HLIB.

Meanwhile, foreign contract awards in third quarter 2019 spiked to RM918 million while cumulative nine-month 2019 foreign contracts surged more than sixfold due to domestic contractors shifting focus overseas post-GE14 and absence of foreign contracts in second quarter 2018.

HLIB Research remains “neutral” on the construction sector despite the positive news flow on several project revivals, including the East Coast Rail Link (ECRL), Bandar Malaysia and potentially MRT3.

“We believe the worst is over for the construction sector but this has been largely reflected by the share price rally YTD with the Bursa Malaysia Construction Index up 31%.”

IJM Corp Bhd remains its top pick in the large-cap space as a beneficiary of the ECRL via construction contracts and the positive spillover effect to Kuantan Port (60% stake) and Malaysia-China Kuantan Industrial Park (20% stake).

“Within the mid-small-cap space, we like Sunway Construction Group Bhd (SunCon) as a well-managed pure construction play that is able to bid competitively within the increasing open tender landscape.”


Rakuten Trade lowers year-end forecast for FBM KLCI to 1,720 points

PETALING JAYA: Rakuten Trade has revised downwards its year-end forecast for the FBM KLCI to 1,720 points from 1,760 points previously.

“This is due to the weaker corporate earnings in the bourse and external factors,” said its head of research Kenny Yee at Rakuten’s second-half market outlook briefing today.

For 2019, it has revised the forecast for Malaysia’s corporate earnings to -0.5% from its previous expectations of 2.3% growth.

Nonetheless, Rakuten is optimistic on Malaysia’s index-linked blue-chip stocks, particularly within the banking sector due to a low prevailing foreign shareholding level of 14.9% and the fact that many are trading at reasonable levels.

At the moment, the FBM KLCI is estimated to trade at a price-to-earnings ratio of 15.5 times against a historical five-year average of 18.0 times.

During the session, Yee shared some of the research house’s top picks, including Crest Builder Holdings Bhd, Econpile Holdings Bhd, Kelington Group Bhd, MBSB Bank Bhd and Serba Dinamik Holdings Bhd.

He noted that the merger between Telenor ASA and Digi.com Bhd has proved to be a boon to the sector, which has managed to outperform the market. Once the merger is concluded, Yee expects there will be more merger & acquisition (M&A) activities in the sector.

The banking sector is also expected to see more M&As as local banks have reached their saturation point with the need to expand regionally and to counter the imminent digital banking wave.

On the currency front, Rakuten expects the ringgit to test the RM4.00 level against the US dollar by the end of the year. “This will be driven by foreign net inflows and the start of pump-priming activities in the country,” Yee explained.

The pump-priming activities will come from the resumption of East Coast Rail Link, Bandar Malaysia and infrastructure projects related to the Penang Transport Master Plan. Once these mega projects are kick-started, the market will see an inflow of foreign funds, particularly from China.

When asked whether he foresees another rate cut by Bank Negara Malaysia, Yee opined that it is not likely to happen. This, he said, is because the pump-priming activities would be a better instrument to spur the economy as the construction sector has high spillover effects that would be more effective than an interest rate cut.


Bursa: Healthy IPO pipeline in the second half of the year

KUALA LUMPUR: Bursa Malaysia Bhd expects strong listing activity in the second half of the year with 13 initial public offerings (IPOs), according to its CEO, Datuk Muhamad Umar Swift (pix).

“We have a healthy pipeline of 13 companies to be listed in the second half of the year with an estimated market capitalisation of RM15 billion,” he told reporters at a briefing on Bursa Malaysia’s financial results today.

“While the market is softer, it makes us confident that we are seeing this stream of businesses coming in, that Malaysia has a deep base for investors,” he said.

Of the 13 companies that have received approval for listing, three will be listed on the Main Market and seven on the ACE Market, while the remaining three will be listed on the LEAP Market.

In the first half of the year, a total of 14 companies with a market capitalisation of RM5.5 billion were listed on the bourse.

Meanwhile, Bursa Malaysia’s profit after tax and minority interest (patami) fell 23.6% to RM93.2 million in the first half of the year ended June 30, 2019 (1H19) from RM122 million in 1H18.

Despite a decline in its performance, Muhamad Umar said he is cautiously optimistic for the second half of the year. With the net foreign funds inflows in June, he believes that the market has bottomed out.

“We think Malaysia has a wonderful story, growth is good, we have foreign funds flowing back in again and new projects are coming in, it’s time for investors to consider a comeback,” he said.

Although Muhamad Umar is upbeat on the prospect of foreign fund inflows for the second half of the year, he said it remains to be seen whether they will return to last year’s level due to the uncertainties in the market.

He said trade tensions between the US and China as well as a potential no-deal Brexit would be hurdles for foreign funds to return to their previous level on the local bourse.

“On the other hand, the fundamentals of the local market remain strong – we have a strong and sound banking system as well as positive developments such as the ECRL (East Coast Rail Link) and the relaunching of Bandar Malaysia,” he added.

For 1H19, Bursa Malaysia’s revenue fell 14% to RM250.49 million from RM291.27 million in first half of the previous year. It declared an interim dividend of 10.4 sen to be paid on Aug 30, 2019.


Gadang slips into the red in Q4

PETALING JAYA: Gadang Holdings Bhd saw a net loss of RM3.39 million in the fourth quarter ended May 31, 2019 against a net profit of RM23.31 million a year ago due to recognition of some variation orders for completed construction projects in the preceding year and the significantly lower profit reported for the Capital City project in the current year.

Its revenue however, was 7.3% higher at RM196.9 million compared with RM183.51 million previously.

The board has proposed a first and final dividend of 1.2 sen per share for the quarter under review.

Gadang’s net profit more than halved to RM48.49 million from RM96.38 million in the previous year, while revenue increased 17.7% to RM699.89 million from RM594.77 million.

The group is cautiously optimistic that major construction initiatives such as the revival of the East Coast Rail Line project and the development of Bandar Malaysia infrastructure components will be positive for the group.

It said the construction division will continue to bid for new contracts to enhance its order book as well as focusing on project execution to ensure timely completion of all on-going projects. Its existing outstanding order book stands at RM1.24 billion which will be able to sustain its operation for the next two years.

Meanwhile, Gadang said its property division will be supported by total unbilled sales of RM119.34 million.


IJM downgraded, earnings forecast cut

PETALING JAYA: IJM Corp Bhd’s rating has been downgraded with a cut in its earnings forecast after the termination of its Light Rail Transit Line 3 (LRT3) package as this will have a negative impact on the group’s future earnings, said analysts.

On Tuesday, the group said that it has been terminated as the works contractor for the underground package of the LRT3 from Bandar Utama to Johan Setia, following the remodeling of the project from a project delivery partner model to a turnkey model.

The RM1.1 billion contract was accepted by IJM’s wholly owned subsidiary IJM Construction Sdn Bhd in March last year. However, the entire project was suspended in June 2018 due to an overall cost review.

IJM’s share price declined 5 sen or 2.1% to close at RM2.38 today on 17.29 million shares done.

MIDF Research maintained its estimates at this juncture and target price of RM2 but downgraded the stock to a “sell” call, on the back of a more pronounced downside risk.

“IJM will likely continue facing operational challenges stemming from the slowdown in property and plantation segments. Concurrently, we saw its share price has priced-in the improved sentiment of construction sector amid the return of mega projects namely ECRL and Bandar Malaysia,” it said.

PublicInvest Research reduced IJM’s FY20-22 earnings forecast by 1-2% but noted that earnings would remain relatively stable backed by IJM’s balance orderbook of about RM6.7 billion and unbilled property sales of RM2 billion.

“IJM also stands a good chance to win more infrastructure related contracts given its capabilities as more jobs are rolled out in the not too distant future,” it said. It maintained its “neutral” call with a higher target price of RM2.60.

CGS-CIMB said the immediate focus will be on compensation/claims in relation to works done but not paid, including the preliminary works done during the three months prior to the project’s suspension.

“We also suspect that IJM may pursue claims, or payment, for the amount that was spent on the procurement of the tunnel boring machines, which is essentially part of project cost,” it said.

In the event the termination restricts any compensation element, it believes that IJM may require to make certain provisions or write-downs, the value of which it is unable to estimate due to lack of details.

CGS-CIMB said that the forgone profit and assumed 5% pre-tax margin makes up 3-4% of FY19-20 earnings per share hence the impact to revalued net asset value and target price is minimal.

“However, we believe this news would be negative to IJM’s share price, considering that previous indications pointed to the likelihood of an amicable renegotiation on the contract. Pending more details on the rationale of the termination and the next course of action, we keep our FY20-22 EPS forecasts,” it said while maintaining its “hold” call and RM2.10 target price.

Excluding LRT3, IJM’s orderbook of RM6.7 billion comprises roads, buildings and infrastructure jobs. Cumulatively, the remaining outstanding amount provides three times visibility to its construction revenue in FY19.


Bursa Malaysia slightly lower at mid-morning

KUALA LUMPUR, June 27 — Shares on Bursa Malaysia were slightly lower at mid-afternoon as losses in mainly finance, healthcare and plantation heavyweight stocks, outweighed mild gains recorded elsewhere in the market. At 11.05am, the key FTSE Bursa…


Bursa Malaysia poised to gain further to test 1,620 level

KUALA LUMPUR: Bursa Malaysia is set to rise further next week to test the immediate resistance at 1,620 and the next resistance threshold of 1,650.

Phillip Capital Management, Asia-Pacific, senior vice president (investment) Datuk Dr Nazri Khan Adam Khan said the near-term view suggests that the KLCI will continue hovering above the key support level of 1,600.

He said positive overnight Wall Street performance, Bank Negara Malaysia’s overnight policy rate (OPR) cut, rising prices of commodities and ease of the US-China trade tension would drive positive sentiment next week.

“Although the ongoing trade tension gave a sour impact to the ringgit versus the greenback, the local market remains attractive with the capital market recording a net inflow of RM2.1 billion,” he said.

Fundamentally, the local market continues to be resilient against the external headwinds with diversified sources of growth.

“Our participation in the ‘Belt and Road Initiative’ will give long-term advantage to the economic growth, as an important catalyst for foreign direct investment and connectivity to the global market.

“Looking forward, the lower OPR could be an important factor to boost the local economy in the second half of the year,” he said.

Nazri Khan said OPR cuts and the revival of the East Coast Rail Link and Bandar Malaysia projects would give a breath of fresh air for economic growth.

He said despite the weakness in investment activities, the local market posted a 4.5% growth in the first quarter of 2019.

“This is partly derived by the positive improvement in the agriculture sector and firm private consumption. This gives positive impact to the manufacturing sector, as well as the household spending,”he said.

In line with the encouraging private sector spending, BNM maintained its projection that the GDP will continue to grow between 4.3% – 4.8% this year.

He said despite the US-China spat have gave sour impact to the ringgit against the greenback, the local market remained to be attractive, given the RM2.1 billion net inflow recorded in the capital market.

Nazri said the S&P 500’s three-day winning streak during the week showed calmness towards the current state of trading relations between Washington and Beijing.

“We believe the US’ decision to effectively ban Chinese phone maker Huawei from the US market has overshadowed the earlier move to apply import taxes on European-made cars,” he said.

Overall, Bursa Malaysia was mostly higher despite the mounting concerns over the US-China trade spat.

On a Friday-to-Friday basis, the benchmark FBM KLCI settled 4.91 points weaker at 1,605.36.

The FBM Emas Index declined 74.91 points to 11,300.05, the FBMT 100 Index depreciated 68.25 points to 11,136.80 and the FBM Emas Shariah Index erased 99.09 points to 11,451.34.

The FBM Ace Index fell 137.43 points to 4,395.14 and the FBM 70 shrank 223.73 points to 13,855.32.

Sector-wise, the Financial Services Index dropped 3.31 points to 16,562.87, the Plantation Index eased 154.78 points to 6,895.50, and the Industrial Products and Services Index gave up 2.86 points to 163.82.

Weekly turnover inched down to 11.80 billion units valued at RM9.41 billion from 12.71 billion units valued at RM9.87 billion last Friday.

Main Market volume was weaker at 6.97 billion shares worth RM8.65 billion compared with 8.02 billion shares worth RM8.85 billion.

Warrants turnover slid to 1.67 billion units valued at RM427.70 million from 2.54 billion units valued at RM704.83 million.

The ACE Market volume, however, was higher at 3.22 billion shares worth RM326.88 million from 2.14 billion shares valued at RM301.87 million previously. – Bernama


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