Leap Cycle for Construction Sector
 The crane population in Singapore is booming, and we are not talking about those of the feathered species. In fact, motorists passing by the Marina Bay construction area may be forgiven if they mistake it for a crane yard, judging by the number of tower cranes hovering over it. A Strait Times reporter counted at least 70 to 80 cranes in a news article last October.
A UBS Investment Research Report released in January, committed construction projects comprising government infrastructure works, residential homes, commercial sites and oil and gas related projects estimated at S$54 billion will be executed over the next two to three years, making it the biggest “synchronised boom” in the Republic despite some concerns over tightening supply in labour, raw materials as well as project funding.
According to the Building and Construction Authority (BCA) of Singapore, the order book for projects is estimated to be between S$23 billion and $28 billion this year, and is likely to be sustained into 2009.
The BCA expects the private sector to account for 70% of these estimates, urged on by rising building demand especially in the commercial sector including those of new petrochemical projects on Jurong Island and Pulau Bukom by the oil majors, Shell and ExxonMobil.
Noted UBS, “En-bloc sales of S$13.3 billion for 2007 have surpassed the previous record. The redevelopment of these sites into new residential and commercial builds should shore up demand.”
It added that the greater pace of government’s land sales and enhancement programmes for public housing estates and amenities should extend the construction cycle. These would include some 40,000 units of HDB flats over the next three years as well as upgrading of national park areas, expressways and extension of MRT lines.
Another report by CIMB-GK Research noted that “after a decade in the doldrums, the industry has finally turned the corner in late 2006 with gross margins rising from low single digits to the current 15-20%, with some contracts even priced at 30% gross margins.”
“Pricing power is now shifting from project owners and property developers to construction companies. The demand-supply imbalance is unlikely to correct itself in the next two to three years, which leads us to believe that the strong margins for construction companies are sustainable.”
The CIMB-GK report also noted that the sector is also underpinned by several strong drivers such as population growth which translates into plans for more housing units, schools, recreational areas and transport networks; and economic restructuring efforts to make Singapore into a hub for value-added services for wealth management, conventions and exhibitions as well as tourist destination.
But besides the domestic scene, UBS also pointed out that another estimated U$50 billion worth of projects in China, India and the Middle East would also provided an important source of overseas revenues for local construction firms with geographically-diversified base. The number of trade mission trips, including those led by Senior Minister Goh Chok Tong’s to the region, also underscores the importance of the Middle East market.
The annual growth of construction exports was 32% over the past seven years, with 2006 being the third year in a row that these overseas projects exceeded the S$2 billion mark for local construction firms, noted UBS.
"The demand-supply imbalance is unlikely to correct itself in the next two to three years, which leads us to believe that the strong margins for construction companies are sustainable.” CIMB-GK Research |
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Rising demand also means that operating margins for material suppliers and equipment operators have also been trending up. Rental rates for cranes for example have risen by 10% to 15% over the past year, it added.
It also noted that there is usually no strong resistance to higher prices since crane rentals do not make up a substantial portion of overall costs. “In fact, companies are usually willing to pay a premium to secure availability since liabilities due to delays are far greater.”
The research house who conducted a survey of construction firms here said that 70% of its respondents have reported better margins, with the construction majors reporting margins of 8% compared to 4% five years ago.
It however did point out that while its survey indicated no evidence of cash flow problems from a tighter liquidity environment, wider credit spreads might erode margins. “The gearing of construction companies has risen to 60% and hence earnings are like to be more sensitive to interest rates,” said UBS.
The survey covers some 18 companies including general builders, sub- and superstructure specialists, as well as building material and heavy equipment suppliers, who represents 74% of the market capitalisation of Singapore construction related companies.
UBS is of the view that “Singapore’s construction industry will continue on its growth trajectory after eight consecutive quarters of expansion, albeit at a more moderate pace. The typical Singapore construction up cycle lasts between five and eight years ad the sector is probably in the third year of another long-tailed cycle.”
UBS Stock Picks
Tat Hong Holdings: (12-month Target: $3.38)
The global imbalance in demand and supply of cranes creates an ideal environment for Tat Hong to exploit rental rates. It is also well positioned to penetrate the China market
Tiong Woon: (12-month Target: $1.08)
A heavy lift and installation specialist for the oil & gas and infrastructure sectors, with a 25% share of the domestic crane rental market. Geographically, it also has presence in Malaysia, China, Thailand, the Philippines and Middle East
CIMB PICKS
CSC Holdings (Outperform) Target $0.57
CSC should stand a good chance of securing more foundation contracts as there are few such specialist contractors in Singapore. It recently acquired L&M Foundation Services, which is expected to play a key role in securing future large-scale projects.
Lian Beng Group (Outperform) Target $1.32
Lian Beng's integrated business model offers substantial self-sufficiency and business resilience as it has its own fleet of construction equipment, as well as structural steel fabrication, ready-mixed concrete and outer-wall scaffolding capability. This has helped support its margin expansion while minimising its exposure to rising prices industry-wide. Lian Beng has a sizeable order book of S$608m, which will keep the company busy for the next 24-30 months.
Rotary Engineering (Outperform) Target:S$1.44
Rotary has an order book of S$585m, and the Exxon-Mobil Singapore Parallel Train could be another share-price catalyst. Additionally, management's push to secure skilled labour from China and India through its own recruitment and training centres will be key to the execution of its strategy.
Tai Sin Electric Cable (Outperform) Target: S$0.61
Tai Sin's strong performance in the last two years was driven by strong copper prices. It has expanded the capacity for its Singapore plant, and its expansion into Vietnam is also a positive move to tap the strong demand there.
Tat Hong Holdings (Outperform) Target: S$4.43
The company’s management has expressed confidence and optimism on growth prospects on the back of the global shortage in construction cranes. Rates had risen 20% in the last quarter compared with 5-10% a year ago. It hopes that China will contribute as much as 20% of group gross profit within the next two years.
Tiong Woon Corporation (Outperform) Target: S$1.45
Its outlook remains excellent with strong customer demand. The incorporation of its subsidiary TWC Arabia, and award of the commercial registration licence in Saudi Arabia mark the start of Tiong Woon’s entry into the Middle East. The company plans to expand its crane fleet from 50 to 150 units within the next two years to focus on the oil and gas segment.
Yongnam Holdings (Outperform) Target price of S$0.42
As one of the largest structural player in the region, it also stands to benefit from the Singapore government’s announcement to spend S$50 billion on infrastructure projects between now and 2020 on new expressways and MRT lines, as well as projects in the Middle East..
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