KUALA LUMPUR: The sudden surge in the share price of Lafarge Malaysia Bhd last Thursday left investors mulling over its unexpected climb, with the potential revival of the East Coast Rail Link (ECRL) being touted as the most plausible reason.
Towards the end of his official visit to Manila last week, Prime Minister Tun Dr Mahathir Mohamad reportedly told the media that Putrajaya’s stance remains the same: that it prefers to avoid an astronomical compensation and is trying to strike a deal with China to build the rail line at a more affordable price tag.
Finance Minister Lim Guan Eng also reportedly said that he hopes the ECRL negotiation between Malaysia and China can be concluded before Dr Mahathir’s scheduled second official visit to China for the Belt and Road Summit 2019 next month.
As the events unfold, there may be investment opportunities for investors looking for exposure to the construction sector, beaten down for the greater part of last year due to political uncertainties in the wake of a new government, then made worse by the review of mega infrastructure projects.
Based on feedback from construction sector analysts, The Edge Financial Daily outlines 10 stocks that could be potential beneficiaries should the ECRL project be revived.
In no particular order, they are Gabungan AQRS Bhd, HSS Engineers Bhd, IJM Corp Bhd, Lafarge, Econpile Holdings Bhd, Malaysian Resources Corp Bhd (MRCB), Advancecon Holdings Bhd, Gadang Holdings Bhd, WCT Holdings Bhd and Fajarbaru Builder Group Bhd.
Assuming Lafarge’s and HSS Engineers’ previous contracts can be reinstated, RHB Research analyst Tay Yow Ken believes these two counters would be the clearest beneficiaries.
“Looking back to before the project was shelved, HSS Engineers and Lafarge were respectively awarded contracts worth RM82.5 million and RM270 million. Hence, we believe these companies are the clearest beneficiaries if the project is revived, assuming their previous contracts are reinstated as well,” he said in an email response.
Tay also noted that ECRL’s main contractor, China Communications Construction Co Ltd, had yet to award engineering and construction packages when the project was suspended in July last year.
“In our view, the extent local contractors are able to benefit would very much depend on the project structure after negotiations conclude, assuming the outcome is positive. That includes items such as local content requirement and what’s left on the table in terms of profit margins. Remember that the revived project will be subject to cost cuts and changes in design.
“According to our ground checks, quite a number of contractors had expressed their interest in bidding for contracts as the pie was large. That included the likes of IJM Corp, Advancecon, Gabungan AQRS and Econpile. More recently, MRCB told analysts during a recent conference call that it would be interested to participate in the project if tenders were called,” he said.
Malacca Securities Sdn Bhd analyst Kenneth Leong said Gadang Holdings, WCT Holdings and Fajarbaru Builder could also see some interest given their construction capabilities.
“These companies have rail project experience so we wouldn’t want to rule out the possibility of them tendering for packages,” he said over the phone.
However, Leong cautioned that in general, profit margins for construction contracts are small, and with a lower price tag for ECRL, the margins could be even smaller.
“We can already see some players, like Econpile, affected by the revised contract value for building the second MRT (Mass Rapid Transit) line,” he said.
Econpile posted a net loss of RM34.45 million for the second quarter of financial year 2019 (2QFY19) ended Dec 31, 2018, against a net profit of RM22.73 million a year ago. Revenue also fell by 8.6% to RM148.18 million, from RM162.17 million in 2QFY18.
The piling expert said its bottom line was hurt by loss of RM18.5 million owing to a delay and idling costs from two infrastructure projects caused by overall project rationalisation of costs and changes in design and/or scope of work by main contractors, and a RM15.4 million cost overrun in a property development project.
Meanwhile, in a note to investors last week, Hong Leong Investment Bank analyst Khairul Azizi Kairudin said news of a potential revival of the ECRL also pushed up the share price of Tasek Corp Bhd and Hume Industries Bhd, two other cement players.
“However, we reckon that the ECRL alone will be insufficient to spur demand to overcome industry overcapacity. To recap, Lafarge won a RM270 million cement supply contract for the ECRL back in March 2018. Based on the contract period of two years, this translates into RM135 million per annum, which only forms 6.4% of [Lafarge’s] financial year ended Dec 31, 2018 revenue,” he wrote.
Malacca Securities’ Leong observes that investors could take advantage of the current positive sentiments, but believes it is better to wait for more details from Dr Mahathir’s trip to China in April.