The research arm of Hong Leong Investment Bank Bhd (HLIB Research) expects construction real gross domestic product (GDP) to rebound by 16.6% next year, after marginally dropping by 0.6% in 2021.
Guided by the 12th Malaysia Plan’s (12MP) 4.2% annual growth target, HLIB Research expects the sector GDP growth to decelerate thereafter.
“In 2021, expectations of a recovery were completely derailed by a stronger Delta driven COVID-19 wave resulting in multiple shut downs of site activities and below par productivity levels for a sizable portion of the year,” said HLIB Research as quoted by Borneo Post.
“However, recovery sustainability this time around looks to be a higher probability scenario (versus 2021) buoyed by high vaccination rates of approximately 78.3% of total population, high natural immunity benefits from past infection and shift in government’s mind-set towards endemicity.”
The research arm’s base case for next year is predicated on lower severe cases of COVID-19 leading to occasional flare ups as well as sporadic site closures but not blanket lockdowns, reported Borneo Post.
“Perhaps unsurprisingly, construction GDP estimates for 2022 is still roughly 10% below 2018-2019 levels we reckon due to persistent productivity issues, labour shortages and approaching tail end for some projects,” said HLIB Research.
“Recent discovery of the Omicron variant, depending on its characteristics is a downside risk to this base case.”
For 2022, the research arm expects sector coverage core earnings to double, driven by longer operational days, positive operating leverage and higher site productivity.
The seemingly impressive growth rate is mainly base effect driven as HLIB Research’s forecast for financial year 2021 are even weaker compared to FY2020.
“Putting this in context, our earnings projections on a cumulative basis are 15% lower than pre-COVID-19 levels due to ongoing challenges including impaired productivity, worsening labour shortage, hostile costs environment and slightly lower outstanding order book,” it said.
Based on current circumstances, HLIB Research sees limited scope for earnings upgrades as it expects the aforementioned factors to persist next year.
“To the contrary, beyond the factors mentioned above, should the new variant prove to be worst this may trigger another earnings downgrade cycle,” it said.
“At the time of writing, there is little definitive evidence of Omicron to drive our forecasts and views going into 2022.”
“Barring any rerating catalysts, sector recovery prospects are largely priced in at current earnings multiple ~12.2 x price-to-earnings (P/E) multiple on next 12 months (NTM) earnings per share (EPS),” added HLIB Research.
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