Engineering & Construction -Strong Pipeline Of Projects Ahead
The construction sector in Singapore is poised for growth, supported by a healthy pipeline of government projects over the next few years. We are OVERWEIGHT on the sector. Competition is likely to remain keen (from both local and overseas players) and margins should remain under pressure. Our Top Pick is Lian Beng Group (LBG), in view of its good track record and ability to maintain margins.
¨ Growth driven by government projects. Construction demand in 2014 is expected to remain strong, supported by government projects to enhance overall infrastructure. Pipeline projects include Changi Airport expansion, increased rail network and an increase in HDB estates. Given that most of these are billion-dollar projects spanning a few years, the main contract is usually awarded to large foreign players. Nonetheless, local listed construction and related companies, especially those with a good track record, stand a chance of securing parcels of work in these major projects (either to build a section of the entire project or to supply materials/equipment).
¨ Margins likely to remain under pressure. The construction sector hires a significant number of foreign workers. As the foreign worker levy will be raised come mid-2014, rising labour costs would put more pressure on margins, although this may somewhat be mitigated by stable raw material prices. While companies can factor in higher labour costs in project tenders, the stiff competition in the sector could continue to put a lid on margin improvement.
¨ OVERWEIGHT on sector. Despite competitive pressure and margin risk, positive catalysts for construction stocks could come from earnings contributions from various public projects (eg MRT construction and HDB projects). On top of that, some of these construction companies have stakes in property development, with target completion in 2014. We think there are a good number of companies that can benefit from the positive outlook for the sector, particularly those: i) with experience building or supplying construction materials for HDB estates (eg BBR, Chip Eng Seng, LBG, United Engineers, Hafary), and ii) which had been involved in the construction of bridges/roads/earlier MRT lines (eg Yongnam, Pan United, Hock Lian Seng). Our Top Pick is LBG (LBG SP, BUY, TP: SGD0.70), as it has a good track record and has maintained relatively stable margins.
Publish date: 23/12/13