Game-Over for Construction Sector? (28 Feb 2011)

All are going very well for Malaysia construction sector last year in line with the recovery of economy until it hit the first "hard bump" last week. We all know that construction sector is very volatile, influenced by the health of global economy, government's pump-priming projects, and of course the huge overhead costs such as labor and building materials costs.




Somehow, unrest at Middle East are hogging the bright future of Malaysia's construction counters. First, surging oil prices put pressure on the bottom-line of the companies. Second, projects from that oil-rich nations will dampened the outlook with a slew of Malaysian companies venturing successfully into that region.

The Game still going on?

According to CIMB Research, the selling pressure on construction stocks is overdone as jobs in the Middle East account for 3 - 41% of the order books of WCT, IJM Corp, Gamuda and Muhibbah Engineering and the projects are mostly at the tail end with no payment issues so far. 


For instance, IJM only has 3% order book exposure while Muhibbah's balance of works at NDIA 
is backed by the Qatar government's push to complete the job by end-2011. WCT has a geographical advantage in Qatar which appears to be at the lowest risk of a political unrest. As for Gamuda, its Middle East exposure is minimal.

However, Finance Malaysia opine that the panic selling is understandable given the past experience of LCL Corp. Before the 2008 financial crisis, and also with high oil prices (just like right now), LCL has a bunch of projects in Middle East especially Dubai. All seems pretty well, until a sudden sharp drops in oil prices landed the oil-rich nation into huge budget deficit. Subsequently, LCL is facing cash flow problems which forced the company being delisted. A company with great potential go burst in few months. Of course, traders do take precautions now to avoid that same fate.

But, given the continuous ETP projects being rolled out by government this year, and also the "election factor", I think construction sector is very happening at least for another few months. Government: "The game must go on?"

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