Public projects boost construction
Construction and engineering companies can expect respite from slowing economy with public sector projects
The past few years have been tough for the local construction industry, which faced the challenges of a slowing economy and increasing manpower costs.
But construction and engineering companies can expect some respite this year.
In January, the Building and Construction Authority (BCA) announced that construction demand will increase this year, driven by public sector projects.
This bodes well for the 10 largest construction and engineering stocks of the Singapore Exchange (SGX).
The 2017 year-to-date average performances of these stocks have been almost triple that of its regional peers, noted an SGX report last month.
These stocks generated gains averaging 27 per cent in total returns, compared to the 9 per cent gain of Asia Pacific's 10 largest construction and engineering plays.
SGX lists more than 50 construction and engineering stocks. They have a combined market capitalisation of $7.8 billion, which makes up 4 per cent of the $184 billion capital goods segment of stocks.
The performance of Singapore's construction companies have been lacklustre in the past few years, with its biggest stocks seeing a 16.6 per cent gain in the last five years. In contrast, Asia Pacific's 10 largest construction and engineering stocks saw a 20.1 per cent five-year average annualised return.
The industry's better performance this year can be attributed to the Government's plan to bring forward $700 million for public sector infrastructure projects within the next two years.
The public sector is expected to contribute about 70 per cent of the total construction demand, boosted by an increase in demand for most building types and civil engineering worksBCA
It was announced at the Budget this year that these projects, which private constructions firms can bid for, will include upgrading of public amenities such as community clubs and sports facilities.
A day after the Budget announcement, stocks of construction companies, such as Swee Hong and Lian Beng, saw a burst of activity, reported The Business Times in February.
In January, the BCA projected construction demand, or value of construction contracts to be awarded this year, to be between $28 billion and $35 billion.
Last year's preliminary estimate was $26.1 billion.
"The projected stronger construction demand is due to an anticipated increase in public sector construction demand from about $15.8 billion last year to between $20 billion and $24 billion this year.
"The public sector is expected to contribute about 70 per cent of the total construction demand, boosted by an increase in demand for most building types and civil engineering works," said BCA's release.
Private sector construction demand, however, is likely to remain subdued and is projected to stay between $8 billion and $11 billion this year, it added.
Indeed, two of the best performing construction companies in the year to date are involved in public sector projects.
Lian Beng, which has seen a 34 per cent gain in the year so far, announced in March that it has clinched its biggest-ever construction contract - worth about $435 million - to redevelop a Housing Board industrial complex at Defu.
The high-rise industrial complex will provide a sustainable flow of activities through FY2020, it added in a release.
The company, which is categorised as an A1 grade contractor by BCA with an A1 grade in civil engineering, was first established in 1973.
Companies graded A1 will be able to tender for government projects of any size.
Another company, Hock Lian Seng Holdings, which generated a 59.7 per cent year-to-date gain is also categorised as a Grade A1 contractor by BCA.
It also managed to generate the highest three-year returns of 160.1 per cent, noted SGX.
Last year, Hock Lian Seng entered into a $1.107 billion joint venture with Sembcorp Industries to carry out development work for the three-runway operations at Changi Airport.Last month, it successfully bid $3.708 million on a 4,890 sq m site at Tampines Industrial drive, which has a tenure of 20 years.
But investors should note that both companies have reported lower earnings recently.
Last month, Hock Lian Seng announced a profit of about $2 million, which was 16.6 per cent lower on a year-on-year basis.
The results were attributed to a rise in administration and tax expenses, despite an increase in gross profit of 68.1 per cent.
In April, Lian Beng announced that its net profit in the nine months ended Feb 28 saw a 68.4 per cent year-on-year decrease, to $24.3 million.
Over the same period, its revenue decreased 57.4 per cent year on year to $156.2 million mainly due to a decrease in revenue generated from the construction segment and ready-mixed concrete segment.
BCA projected that the average construction demand in the next few years would be lower compared to this year.
In 2018 and 2019, demand will be between $26 billion and $35 billion a year. In 2020 and 2021, demand is projected to be between $26 billion and $37 billion a year.
It also highlighted upcoming mega infrastructure projects such as the Jurong Region Line, Cross Island Line, and developments for Changi Airport Terminal 5 as some of the projects that would bolster the industry in the next few years.
Dr John Keung, chief executive of BCA, noted in January that the year-to-year fluctuations in construction demand are dependent on the "lumpy" nature of major infrastructure projects but overall construction activity will remain high.
"Companies that are prepared to change... to stay at the forefront of technological innovation, process re-engineering and productivity improvement are more likely to sustain growth and competitiveness despite the headwinds under challenging economic conditions," he added.