Construction: Easing Raw Material Prices

Analysts are not overly concerned about the building materials price headwinds because the relevant companies are still able to mitigate the impacts

Construction: Easing Raw Material Prices
Photo by EJ Yao / Unsplash

Average steel bar prices in Malaysia declined -2%mom to RM3,802.37 per tonne in Aug-22 (Jul-22: -0.57%mom to RM3,879.64), going into its second consecutive month of downtrend, in line with the softening trend of hard commodities globally.

Though on a year-on-year basis it was still an increase of +19.6%yoy, this was lower as compared to +22.8%yoy in Jul-22. Meanwhile, cement prices inched upwards by +0.24%mom in Aug-22 to RM21.04 per 50kg bag.

On a year-on-year basis, the increase was +11.38%yoy, lower than +11.71%yoy recorded in Jul-22.

Boomi Appoints Larry Quinlan to Its Board of Directors
With experience running a $45B professional services firm’s technology strategy, Quinlan sits on numerous boards, including those of two public companies: ServiceNow and Jones Lang LaSalle

Meanwhile, MIDF says it is not overly concerned about the building materials price headwinds because the relevant companies are still able to mitigate the impacts.

Consumers Bear The Cost

"We reiterate our view as per our previous reports that we are not overly concerned about the building materials price headwinds being a huge risk to the companies under our coverage as it is still able to mitigate the impacts, on top of margin protection measures such as variation-of-price clauses, which allows part of the additional cost to be passed on to clients.

"Even if such elements are not available, some contracts would have priced in potential cost inflation or negotiations would have been engaged with clients to reprice contracts or to put in place huge buffers for possible spike in prices.

"We expect margins to continue improve in 3QCY22 onwards though a dampener may be due to higher labour cost due to a shortage of foreign workers as contractors are paying more for critical projects, but we expect this situation to improve moving forward as construction is among the sectors that are allowed to hire from all 15 permitted source countries," it says.

Positive On Construction Sector

The analyst firm says it remains positive on the sector despite all the headwinds.

"With all the ongoing and upcoming developments, we are staying POSITIVE on the construction sector, with a preference for companies with robust balance sheets, namely Gamuda (BUY, TP: RM4.02), IJM Corp (BUY, TP: RM2.18) and Sunway Construction (BUY, TP: RM1.87), all of which are front-runners for the MRT3 main contracts.

"Our smaller-cap pick would be Gabungan AQRS (BUY, TP: RM0.52), a contractor which is selective on jobs undertaken with double digit margins and one with sound margin protection measures in the forms of variation of price (VOP) and ability to renegotiate private contracts with its clients.

"For the Sarawak-themed play, our choice is Cahya Mata Sarawak (BUY, TP: RM1.37), being the sole cement manufacturer in the state, coupled with a relatively large construction business," says MIDF.