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Monday, July 27, 2009

Rosier financials seen for builders

KUALA LUMPUR: The Malaysian Construction fraternity is expected to show a better performance in the second half of this year given cheaper construction materials, said an industry body.

Ng: Third and fourth quarters should be quite encouraging.

“Third and fourth quarters should be quite encouraging. You can see the number of tenders coming from both government and private sectors,” Master Builders Association Malaysia (MBAM) president Ng Kee Leen told The Edge Financial Daily in an interview. MBAM represents some 3,000 construction companies across the country.

Updates by the Construction Industry Development Board Malaysia (CIDB) indicated that a total of RM90.88 billion and RM74.16 billion worth of jobs were awarded in 2007 and 2008, respectively.

OSK Research Sdn Bhd analyst Jeremy Goh said builders which had secured projects based on costlier building materials last year could anticipate fatter profit margins this year. This is because the current price of materials such as steel bars has fallen substantially from its peak then, while the value of the jobs secured had remained unchanged.

“Although steel prices have rebounded, they are still way below what they were last year. Most of what was secured last year will be reflected in this year’s profits.

“We are going to see continued profit margin expansion in the third and fourth quarters of this year,” Goh said.

Domestic steel bars are transacted at some RM2,000 a tonne now, up from a low of around RM1,700 a tonne in November last year. Prices of the material had climbed to some RM4,000 a tonne in the middle of 2008 amid record high crude oil prices.

While the Malaysian steel sector has been liberalised to allow builders to use imported steel bars, it is worth noting that the bulk of the steel bars used domestically is derived locally due to complexities in importing the bars.

Imported items would first have to be evaluated to comply with Malaysian standards before they can enter the country, hence, extra time and money spent to buy these items from abroad.

This is in contrast to the mutual recognition agreement adopted by certain countries which recognises internationally-approved steel bars that need not undergo further quality control measures.

MBAM’s Ng said: “No doubt we have liberalised a lot, but there is still room for improvement.”

Recently, local builders spoke out against the amended Stamp Duty Act. The amendment, effective Jan 1 this year, imposes a 0.5% tax on the contract value in ordinary service agreements. The stamp duty rate was previously fixed at RM10.

Ng has said the new tax regime results in construction cost rising by between 1% and 2%.

Meanwhile, RHB Research Institute analyst Joshua C Y Ng foresees large-scale government projects being deferred further, given its emphasis on dishing out smaller-scale jobs under the two economic stimulus packages within the next one-and-a-half years.

These mega projects include the extension of the Putra and Star light rail transit facilities, estimated at about RM4 billion each, besides the about RM5 billion Gemas-Johor Bahru double-tracking railway project.

“Also, the government’s recent move to ask Bank Pembangunan Malaysia to fund RM6.7 billion, equivalent to 54%, of the RM12.5 billion Ipoh-Padang Besar double-tracking project may be a tell-tale sign that the government is facing financial constraints in funding mega projects.

“All these do not bode well for large construction players,” Ng wrote in a note.

The analyst, who is underweight on the local construction sector, also highlighted the possibility of a weak private sector job flow due to funding scarcity against a fragile global credit backdrop.

OSK’s Goh, however, argued that private projects constituted a minor portion of domestic construction jobs, hence, no substantial risk to the sector’s growth.

By The EDGE Malaysia (by Chong Jin Hun)

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