Malaysia’s beaten down construction sector downgraded by UOB KayHian

Malaysia ringgit notesMalaysia ringgit notes

UOB KayHian downgraded Malaysia’s construction sector despite the sharp selloff since the shock election outcome earlier this month, pointing to a poor growth outlook.

“While investors have become overly-bearish and we foresee shares rebounding from historically low valuation levels, we downgrade the construction sector to Market Weight for its lack of growth drivers,” the brokerage said in a note on Monday.

It noted construction and highway concession-related shares “capitulated,” with the ones under its coverage plunging 20-44 percent last week, after the election results showed Pakatan Harapan had pulled off an upset victory.

“Fears have mounted on the government-dependent construction-related sector/stocks, in view of PH’s socialistic manifesto to abolish toll collections and review all mega projects in the country,” UOB KayHian said.

It pointed to fears that the government would cancel or defer already-approved mega projects and that it would review the terms of existing mega projects secured on a non-merit basis.

However, the brokerage didn’t expect reviews of road maintenance contracts to take place.

“While share prices of road maintenance concessionaires Protasco and CMS have also plunged, these companies are likely to renew their respective contract awards given their competitiveness,” it said. “For example, Protasco won tenders from both Barisan Nasional and PKR-controlled states (Perak and Selangor), while CMS’ competitiveness lies in its 100 million ringgit state-of-the-art equipment and experienced staff.”

UOB KayHian kept its Buy calls on Gamuda, CMS, Gabungan AQRS and Protasco and added that value had emerged in Hold-rated WCT and MRCB. But it noted that target prices would need to be revised lower.

It also put its Overweight call on Malaysia’s building materials sector under review.