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CONSTRUCTION DEMAND growth is looking more promising for several firms in the industry, said CIMB-GK analyst Lawrence Lye, who maintained his ‘Overweight’ rating on the sector this week.
The government's commitment to bump up its share of construction demand this year to 65%-90% (compared to 42% in 2008) has contributed to better 1Q09 earnings for quite a few construction firms, which has convinced CIMB-GK to make the sector its top pick in Singapore.
Indeed, 1Q09 GDP figures from the Ministry of Trade and Industry released yesterday show construction (up 9.6%) and financial services (up 7.7%) to be Singapore's only two sectors that showed quarter-on-quarter improvement.
In the recent results reporting season, NextInsight found that around 11 construction stocks saw quarter-on-quarter improvement, outperforming the 14.6% sequential contraction of Singapore’s GDP.
| Mkt Cap ($m) |
1Q09 net profit ($m) |
4Q08 net profit ($m) |
Growth (q-o-q) |
3-mth total stock return |
|
| SAN TEH | 93.67 | 1.3 | 0.01 | 13300% | 26% |
| LUM CHANG | 71.7 | 3.7 | 0.2 | 1568% | 40.7% |
| BRC ASIA | 67.2 | 1.2 | 0.2 | 539% | 25.2% |
| SIM LIAN GROUP | 215.8 | 13.7 | 9.5 | 44% | 35.7% |
| WEE HUR | 102.7 | 4.3 | 3.6 | 19% | 68% |
| CHIP ENG SENG | 223.6 | 12.4 | 10.8 | 15% | 101.8% |
| OKP HOLDINGS | 75.7 | 3.2 | 3 | 5% | 69.6% |
| KOH BROTHERS | 103.1 | 1.1 | 1.1 | 4% | 67.9% |
| ENGRO | 97.3 | 0.92 | -1.5 | - | 48.2% |
| HONG LEONG ASIA | 381.4 | 23.2 | -15.6 | - | 94.5% |
| UNITED ENGINEERS | 337.3 | 8.5 | -4.6 | - | 44.3% |
Data source: Bloomberg / NextInsight, 19 May 2009
Meanwhile, construction stocks have run up a fair bit, with stocks like Hong Leong Asia, Wee Hur, Chip Eng Seng and OKP beating the STI’s gains of over 50% since its March low.
But the current market rally is not without its detractors; some point to a lack of underlying fundamentals.
As a case in point, we also found another 20-odd construction stocks that either fared worse q-o-q, or lost money in 1Q09.
Weak fundamentals failed to deter their stock prices from surging with the crowd over the past 3 months.
For example, Tiong Woon’s stock price more than doubled to about 40 cents despite its q-o-q earnings contraction.
Then there are those stocks that have run up in anticipation of earnings surprises on the upside.
One example would be CSC, which has nearly doubled its price over the past 3 months. CIMB-GK has an outperform rating on this stock which is expected to announce its earnings next Wed (27 May).
2009 demand: S$22bn-S$28bn. 2010, 2011 demand: S$20bn-S$27bn. Data source: Building & Construction Authority/ CIMB-GKIndustry players believe the public sector-led construction demand is expected to last 2-3 years, as the government has said it intends to spend another S$15 billion to S$17 billion annually in 2010 and 2011.Public sector projects in the pipeline include the Downtown MRT Line, Marina Coastal Expressway, Sports Hub, a new cruise liner terminal, parks in the Marina Bay area, new and the upgrading of HDB estates, water and drainage projects, and schools, etc.
CIMB-GK believes there should still be significant flow-through of contracts for Singapore construction companies, especially specialist contractors.
Sim Lian also erects public housing. Above: HDB project in Tampines.So what do these construction players specialize in?Property developers with roots in construction
Erecting a building requires a diverse range of specialist civil engineering works and property developers rely on main contractors to procure these third-parties services and manage a real estate development project for timely delivery.
Inspired by lucrative residential property launches during Singapore's property booms, more than a few main contractors have integrated vertically into property development.
Sim Lian is one such player with roots as a contractor. It is the first private property developer in Singapore to embark on HDB’s design, build and sell scheme. Construction contributed about a third of its FY08 revenues of S$389.4 million (financial year ends in June). It posted net profits of S$13.7 million for its 3Q09 results, and net margins of 15.6%.
Chip Eng Seng is another main contractor which has forayed into private residential property development. Construction contributed 80% to its FY08 revenues of S$215.8 million. It posted a 1Q09 net profit of S$12.4 million, and net margins of 16.3%.
More than 95% of its revenues are from Singapore.
Specialist subcontractors may be even larger than the main con, says Wee Hur's executive chairman, Mr Goh Yeow Lian. Photo by Sim KihKoh Brothers operates in three segments: construction and building materials, real estate development, and leisure and hospitality (Oxford Hotel). More than 90% of its revenues come from Singapore. Construction and building materials contributed 86.5% to its FY08 revenues of S$215.8 million. Besides infrastructure project management, it also supplies ready-mix concrete. It posted a 1Q09 net profit of S$60.8 million, and net margins of 1.9%.Other main contractors
Wee Hur is a main contractor that has handled a diverse range of residential, industrial and commercial building construction projects for both the public and private sectors.
It bagged S$4.3 million for its 1Q09 net profit, and net margins of 9.4%. All of its FY08 revenues of S$126.8 million are from Singapore.
Lum Chang: Construction contributed more than three-quarters of its FY08 revenues of S$186.8 million (Jun year-end). Its revenues come wholly from Singapore. Its 1Q09 net profits of S$3.7 million were a significant improvement from the S$200,000 it netted in 4Q08. Net margins were 7.1% in 1Q09.
OKP widened and resurfaced the F1 track for Singapore Grand Prix 2008. Photo: companySpecialist subcontractorsSingapore has one of the best road infrastructures in the world, thanks to civil engineering specialists like OKP. The company builds and maintains airport runways and taxiways, expressways, flyovers, vehicular bridges, urban and arterial (high-capacity connecting) roads. It bagged S$3.2 million in net profit for 1Q09, with net margins of 10.7%. Its FY08 top line was S$101.8 million, mostly from Singapore.
BRC Asia is Singapore’s leading supplier of prefabricated steel reinforcement. Its products are steel mesh, cut-and-bend rebars, and prefabricated cages. It posted net profits of about S$1.3 million for the first six months of its financial year ending Sep 2009. Its FY08 top line was S$203.7 million, mostly from Singapore.
Cement manufacturing contributed 80% to San Teh’s FY08 top line of S$155 million, which comes wholly from Singapore. Peers include Jurong Cement and EnGro Corp. Its 1Q09 net profits of S$1.3 million were a significant improvement from the S$10,000 it netted in 4Q08. Net margins were 3.5% in 1Q09.
