SINGAPORE (Apr 10): CIMB is maintaining “overweight” on Singapore’s construction sector while remaining upbeat on its outlook for 2018.

In particular, the research house prefers specialist civil engineering firms that have established track records for their niche expertise – including its preferred sector pick Yongnam Holdings, which has been rated “add” with a target price of 57 cents.

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This comes after CIMB hosted eight construction companies for its SGX-CGS-CIMB Construction & Infrastructure conference last Friday, where most senior management attendees expressed a generally optimistic outlook for the year.

In a Monday report, lead analyst Colin Tan says that the positive sentiment is due to expectations of higher construction demand from a slew of en-bloc projects to be re-launched as well as major infrastructure projects.  

With the Building and Construction Authority (BCA) projecting the value of construction contracts awarded this year to rise, Tan notes that several companies are optimistic on replenishing their order books in 2H18.

“The construction companies are generally positive on taking on more construction projects in 2018, in view of the slew of en-bloc projects that could be relaunched soon and upcoming mega infrastructure projects, including North-South Corridor, Changi Airport Terminal 5 and KL-Singapore High-Speed Rail (HSR),” says Tan.  

“Specialised struts expertise and track record make Yongnam a likely contender for clinching deals to work on the North-South Corridor. Major project wins should lead to earnings recovery,” he adds.

Highlighting a marked improvement in 1Q18 payment performance based on recent statistics from the Singapore Commercial Credit Bureau (SCCB), Tan thinks a continuation of this trend would shorten construction companies’ cash cycles and boost their capacity to take on more projects.

The BCA tender price index also appears to have bottomed out after reaching a low in 2Q, says Tan. This would result in the consequent bottoming out of construction costs to further benefit construction companies although competition remains keen, in his view.

“The BCA tender price index appears to have bottomed after reaching a low of 96.2 in 2Q17 and settling at 96.7 overall for 2017. We expect construction costs to bottom out in 2018, although companies reported that competition is still keen in their respective segments such as geotechnical engineering and other civil engineering works,” he concludes.

As at 1.13am, shares in Yongnam are trading at 30 cents or 0.5 times FY18 book.