KUALA LUMPUR: Expectations of a recovery in the construction sector for the second half of this year have been dragged down by the first phase of the National Economic Recovery Plan (NRP) as well as the delay in rollout of new mega-contracts, including the Mass Rapid Transit 3 (MRT 3).

After the granting of a work freeze for all construction work in Selangor and Kuala Lumpur last week, contractors are expected to face immediate income risks from the negative impact on the advance invoices.

Last week the ministry put a halt to construction work during the first phase of the NRP, during which only critical maintenance and repair work is allowed. It’s important to note that most of the ongoing major construction contracts are focused on Selangor and Kuala Lumpur, including MRT2, Light Rail Transit 3 (LRT3), West Coast Expressway (WCE), and Damansara-Shah Alam Elevated Highway (DASH).

CGS-CIMB Research estimated that the impact on revenue and earnings per share (EPS) would be “greater” for contractors with real estate companies, real estate investment trusts (REITs) and toll motorway concessions.

“We see a smaller negative impact on the income of the contractors from the current two-week break.

“We are not making any changes to our EPS forecasts and price targets for the time being. At this point in time, we believe industry sentiment will remain cautious given the political uncertainties and the earnings risks from the motion control order, ”it said.

Previously, the research house’s previous rough estimate of the impact of the month-long work freeze as part of the MCO’s first and second phases last year estimated a potential 14% to 22% reduction in earnings per share for the contractors covered.

As a result, CGS-CIMB Research maintains a “neutral” stance on the construction sector as earlier expectations of a recovery issue weighed down by the recent MCOs were anticipated.

CGS-CIMB Research also found in its previous reviews of contractors that the site’s productivity has also slowed significantly since the June 1st MCO.

“In addition, the productivity of the site was disrupted by restrictions in the supply chain, as the building material manufacturing facilities were unused during phase one of the NRP (inventory reduction) decision,” it said.

A work capacity of 60% was imposed for the construction work that was allowed to continue.

Going forward, CGS-CIMB expects the sector-wide share price development to remain weak in the medium term due to the MCO-led overhangs and the ongoing national recovery program.

“We would keep an eye on the stragglers of the sector with perceived stronger recovery angles in the fourth quarter of the calendar year 2021,” it said. Since the beginning of the year, the share prices of the contractors it covers have fallen by an average of 10%, with the big caps of Gamuda Bhd. be cited.

Meanwhile, CGS-CIMB Research said Gamuda Bhd remains the biggest laggard and the potential reactivation of the MRT 3 is the main catalyst for the share price.

For the small-cap sector, the share price of HSS Engineers Bhd is attractive after the revival of the engineering consultancy contracts. According to CGS-CIMB Research, the upside risk in the construction sector is electoral contract introductions after the political emergency has been lifted, while the downside risk is prolonged closures and further delays in job creation.