BT: Analysts staying upbeat on construction stocks

Business Times - 07 Apr 2008

Analysts staying upbeat on construction stocks

By LYNETTE KHOO

DESPITE the upward cost spiral of raw materials such as steel and granite, analysts believe strong orders from both the public and private sector will underpin the construction sector.

In its 'Building Blocks for Growth' investment seminar over the weekend, OCBC Investment Research highlighted the growth prospects in the sector to its preferred clients, pointing to the string of contracts pouring into the local construction sector from public projects to re-invent Singapore as well as jobs from the property sector.

CIMB-GK analyst Lawrence Lye reiterated his 'overweight' rating on the sector in his report dated April 4.

Last year's brisk construction activities brought total contracts awarded to a new record high of $24.5 billion, breaching the previous peak in 1997 of $24.4 billion.

The Building and Construction Authority (BCA) is projecting that some $23-27 billion worth of contracts will be awarded this year.

But analysts are also pointing to the challenges ahead for this sector. Recent downside risks are emerging in the form of higher raw material costs. The upward pressure on prices of construction materials such as steel is further exacerbated by increased global demand for building materials.

'The strong growth in Asia has also buoyed demand for most building materials,' OCBC said in its report. 'In Singapore, the growth in construction demand in 2008 is likely to be broad-based, stretching from residential, commercial, industry to the civil engineering segments.'

Escalating construction costs are leading to higher breakeven prices, Mr Lye of CIMB-GK said, estimating that the construction cost for an average luxury condominium development is at least $450 per square foot.

Another sticking point is coming from the easing of residential property prices, he added. This has recently been reflected in the delay in property launches, lower transaction volumes, as well as the lower-than-expected prices for en bloc sales and aborted en bloc sales.

Mr Lye noted that rising property prices over the past few years have prompted many non-traditional property developers, such as construction companies, media and publishing companies and hotel groups, to jump into the fray to capitalise on quick profits.

The success of these 'newbie developers' hinges on their ability to speed-to-market - to sell their properties quickly before the market turns down and prices fall to below their costs.

But the tide is now turning against them, given the US sub-prime problems in mid-2007 that have led to a substantial weakening in consumer sentiment, and escalating construction costs since early 2007 when the Indonesian government started the export ban on sand and granite to Singapore.

'With continued rising construction costs exacerbated by higher steel prices, these construction companies-turned-developers are likely to be saddled with properties that are below current benchmark prices,' Mr Lye said.

While expressing caution on such companies, Mr Lye recommends that investors focus on pure-play construction companies or specialist contractors. His top picks are Holdings, Tat HongTiong Woon Corporation and CSC Holdings.

OCBC is initiating a 'buy' rating on Pan-United Corp and upgrading its call on Tee International to 'buy' from 'hold'. It does not have a rating for the sector yet.