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Tuesday, November 14, 2017

Construction Stocks Took A Knock

Last Tuesday, Gamuda took a sharp knock on news that it will not play the role of Project Delivery Partner ('PDP') for MRT3 because the Government has opted for the 'build and finance' model by a turnkey contractor to undertake that project. This decision was taken to remove the Government's funding burden as earlier phases. MRT1 & MRT2 were financed by the Government via Danainfra bonds.

The market has now come to apply this decision to other big-ticket projects, such as the High Speed Rail Link ('HSRL') between KL & Singapore as well as the East Coast Rail Link ('ECRL'). This would effectively preclude our big construction companies from these projects and it would hit their order books as well as bottom-line going forward.

This may explain why the share prices of large construction companies took a tumble over the past few days or weeks. Let's look at them individually: 

1) Gamuda is at its intermediate uptrend line, S1-S1 support at RM4.80. If this support breaks, it may drop to the long-term uptrend line, SS at RM4.00.


Chart 1: Gamuda's monthly chart as at Nov 13. 2017(Source: Malaysiastock.biz)

2) IJM has broken below its intermediate uptrend line, S1-S1 support at RM3.30. It is now at the long-term uptrend line, SS support of RM3.00. If this fails, IJM may slide to RM2.00-2.20 horizontal support.


Chart 2: IJM's monthly chart as at Nov 13. 2017(Source: Malaysiastock.biz)

3) YTL has broken its long-term uptrend line, SS support at RM1.50 in November 2016. It is now at the horizontal support area of RM1.10-1.30.


Chart 3: YTL's monthly chart as at Nov 13. 2017(Source: Malaysiastock.biz)

I think the Government's decision on the mode of financing large project must be balanced with the negative impact of undermining one of the important components of our economy, ie. the construction sector. If we let this sector to be weakened- just as we had for the property sector - then the impact on the overall economy will be very severe. If the Government decides to limit the new approach to only MRT3 & ECRL, then the construction sector may enjoy a recovery. Thus you should take a cautious approach when you decide to buy into these beaten-down large construction stocks. I think the Government will announce a limit to its decision with regards to the new 'build and finance' model of undertaking large projects. Good luck.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post.
 However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

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