Game-Over for Construction Sector? (28 Feb 2011)

All are going very well for Malaysia construction sector last year in line with the recovery of economy until it hit the first "hard bump" last week. We all know that construction sector is very volatile, influenced by the health of global economy, government's pump-priming projects, and of course the huge overhead costs such as labor and building materials costs.

Somehow, unrest at Middle East are hogging the bright future of Malaysia's construction counters. First, surging oil prices put pressure on the bottom-line of the companies. Second, projects from that oil-rich nations will dampened the outlook with a slew of Malaysian companies venturing successfully into that region.

The Game still going on?

According to CIMB Research, the selling pressure on construction stocks is overdone as jobs in the Middle East account for 3 - 41% of the order books of WCT, IJM Corp, Gamuda and Muhibbah Engineering and the projects are mostly at the tail end with no payment issues so far. 

For instance, IJM only has 3% order book exposure while Muhibbah's balance of works at NDIA 

is backed by the Qatar government's push to complete the job by end-2011. WCT has a geographical advantage in Qatar which appears to be at the lowest risk of a political unrest. As for Gamuda, its Middle East exposure is minimal.

However, Finance Malaysia opine that the panic selling is understandable given the past experience of LCL Corp. Before the 2008 financial crisis, and also with high oil prices (just like right now), LCL has a bunch of projects in Middle East especially Dubai. All seems pretty well, until a sudden sharp drops in oil prices landed the oil-rich nation into huge budget deficit. Subsequently, LCL is facing cash flow problems which forced the company being delisted. A company with great potential go burst in few months. Of course, traders do take precautions now to avoid that same fate.

But, given the continuous ETP projects being rolled out by government this year, and also the "election factor", I think construction sector is very happening at least for another few months. Government: "The game must go on?"

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The Collapsing Dubai

Once, Dubai World has a motto saying: “The sun never sets on Dubai World”. The state-backed group was the mastermind of world’s famous 7-star hotel, incredible man-made Palm Island, and world’s tallest building – The Burj.

By utilizing the oil wealth, Dubai had diversified into property and tourism since 2001. Property prices had gone up several folds – in this desert. Foreign workers are several times more than their own population. It was doing very well until overspending sets fire on its huge debts.

With up to $80 billions of debts due end of 2009, Dubai is scratching its heads very hard now. This was all started a year ago when the global economic downturn ended the sizzling hot property boom. Dubai was empty pockets after their oil money was drained by collapsing real estate prices and over-ambitious development plans, which sparked panic selling across the world on fears of, prolong global recession.

HSBC and Standard Charted Bank were believes to be the biggest financier to Dubai World, with the rest of the debt financed by regional banks. Yet, can Dubai pay back now? Impossible – with its tiny population and workforce!

Solution?
Luckily, its oil-rich neighbour – Abu Dhabi – is more than enough to fund a bailout and has incentive to do so. In exchange, Abu Dhabi would gain control of Dubai, whether economy or political. Not surprisingly, Abu Dhabi sovereign funds are searching for investments around the world, cited Citigroup as example, eagerly flush its muscle in Dubai. Of course, Abu Dhabi existing economy involvements in Dubai created a too-big-to-fail scenario here.

For us, please rest assured that developments there would not impact our recovery path, except confidence. The dipping of stock markets worldwide this few days was mainly driven by emotional. In fact, this is a very good excuse for investors to exit the markets, which deem profit-taking.