INVE$T | Market Sentiments
09 September 2022
According to Kenanga Research, the Malaysian construction industry is poised for improved earnings in the second half of 2022, given the gradual return of foreign workers and the recent easing in base metal prices. It is reiterating an “overweight” call on the sector, believing that the worst is over. Since the end of June, certain key building material prices, such as steel and aluminium, have come off substantially due to the intermittent lockdowns in China. So are diesel and bitumen on the back of weaker oil prices. Meanwhile, most new contracts being negotiated would have priced in the current market prices (which are higher) and have an element of price variation built in, to protect the contractor’s margins in the event of huge swing in material prices. Overall margins should gradually improve, as the low-margin old jobs tail off and the new projects adjusted for higher input costs start to contribute.
Construction counters under the research house’s coverage saw marginal deterioration in the second quarter of this year. Gamuda Bhd was the only company that beat stronger-than-expected property and construction margins. While on the disappointing end is WCT Holdings Bhd, which saw a weak contribution from its property unit as it struggled to cover overhead costs. Kerjaya Prospek Group Bhd was affected by slower billings on labour shortages.
The margins realised by most contractors in the first half of 2022 were still below the pre-Covid levels, due to the soaring costs of building materials, particularly steel and labour shortages that hampered work progress. Gamuda is the exception, which saw construction margins stronger than pre-Covid levels due to cost savings recognition from its MRT2 project, which is coming to an end. Amid a slow job market, year-to-date, IJM Corp Bhd and WCT have yet to secure any new work packages. Similarly, Kimlun Corp Bhd and Sunway Construction Group Bhd are trailing their replenishment targets. Consequently, orderbook levels of most players are depleting. However, it foresees better job replenishment prospects with the imminent rollout of MRT3 and Pan Borneo Highway (Phase 2). As multinational companies diversify their manufacturing bases geographically (away from China) to de-risk, there are opportunities in the construction of new semiconductor plants and data centres locally.
Asean PMI data shows business improvement – S&P Global
According to S&P Global Market Intelligence economist Maryam Baluch, the Purchasing Managers’ Index (PMI) data for August 2022 signalled an eleventh monthly improvement in business conditions across the Asean manufacturing sector. In its Global Asean Manufacturing PMI report, growth was supported by quicker upturns in production levels and new factory orders. The headline PMI posted at 52.3 in August, up from 52.2 in July, marking eleven months of expansion, with the latest reading indicating a solid improvement in the health of the Asean manufacturing sector.
For Malaysia, while the headline PMI figure was posted above the neutral 50 threshold for the fifth month running at Malaysian manufacturers (50.3), the pace of increase softened from July and signalled only a marginal improvement in operating conditions. In Singapore, six of the seven constituents recorded improvements in operating conditions in August with the country registering the quickest upturn, and for the ninth month running. That said, the rate of increase (56.8) softened from the survey high observed in July to the weakest since March.
Mild growth was noted at Indonesian manufacturers, thereby extending the current run of increase to 11 months. At 51.7, the rate of increase was the quickest in four months. Similarly, at 51.2, the Philippines also reported an improvement in business conditions. Looking ahead 12 months, manufacturing companies remain hopeful of expansion in output. Sentiment improved for the third month running with the degree of confidence the highest since November 2016.
The August data signalled yet another modest expansion across the Asean manufacturing sector. Data suggested that higher production volumes and intakes of new orders resulted in firms raising employment and inventories. Supply-side and inflationary pressures eased during the latest survey period. Lead times lengthened at the slowest pace in 23 months, while input price inflation eased to the weakest in six months. Firms will hope these trends continue. Overall, client appetite across Asean nations remained strong. However, interest rate hikes will likely challenge demand in the coming months.
Eye On The Markets
This week, on Friday (9Sept), the Ringgit opened at 4.4975 against the USD from 4.4880 on Monday (5Sept). Meanwhile, the Ringgit was 3.2068 to the Sing Dollar on Friday (9Sept). On Monday (5Sept), the FBM KLCI opened at 1492.03. As at Friday (9Sept) 10:00am, the FBM KLCI is up 5.78 points for the week at 1497.81. Over in US, the overnight Dow Jones Industrial Average closed up 193.24 points (+0.61%) to 31,774.52 whilst the NASDAQ up 70.23 (+0.60%) to 11,862.13.
