Jan 9, 2007

Construction shares rally as property market booms

Sector rebounds from the doldrums with many new resorts, condos and other upcoming projects

By Goh Eng Yeow, Markets Correspondent

THE moribund construction sector is engineering an impressive comeback, thanks to the foundations being laid by giant projects on drawing boards across the country.

There are, of course, the two integrated resorts (IRs), upmarket condominium projects at Marina Bay and Orchard Road, and a hive of smaller residential developments.

The increased activity and headline grabbing resurgence in sections of the property market - the upmarket One Shenton condo was snapped up over the weekend - are helping to revive retail investor interest.

In the past five trading sessions, penny construction stocks such as BBR Holdings, CSC Holdings and Hiap Hoe all registered gains of more than 60 per cent.

Yet despite the buying interest, there is little research coverage on such shares, given that most analysts gave up on the sector after the property market turned sour a few years ago.

But a CIMB-GK report yesterday said that construction 'is likely to have posed a strong turnaround in 2006, with total construction demand estimated to be close to $12 billion'.

'With the start of major projects like the two integrated resorts, the Marina Bay Financial Centre and Orchard Turn, as well as proposed petrochemical facilities on Jurong Island, the recovery of the construction industry is gaining momentum,' it said.

Awards of contracts for these projects are likely to be carried out in stages, with CIMB-GK expecting the foundation works for the Marina Bay IR to be tendered in three phases.

CIMB-GK research head Song Seng Wun said the firm's analysts plan 'to kick a few tyres and issue a few stock calls on the sector'.

'We are not too sure on issues like the profit margins enjoyed by these firms, and we will have to look into them closely,' he added.

CIMB-GK expects construction demand in Singapore to grow to between $13 billion and $15 billion a year over the next five years.

And while Mr Song expects big international builders to clinch most of the work, local boys will benefit by becoming sub-contractors.

Investors appear to have already made up their minds on which firms they feel will benefit from the pickup.

CSC, for example, jumped eight cents, or 36.4 per cent, to 30 cents yesterday, on a staggering volume of 129.3 million shares.

The buying surge is being driven by expectations that the firm will clinch contracts for piling works for casino and condo projects.

CSC has become a leading engineering contractor specialising in foundations after acquiring L&M Foundation Specialist.

But one dealer said some building firms such as Hiap Hoe and Lum Chang Holdings are being sought after because they have also become niche property developers.

Hiap Hoe is focusing on upmarket condos after acquiring freehold residential sites at Angullia Park and Cavenagh Road, while Lum Chang has bought Belmont Gardens, an existing condo, for redevelopment.

Westcomb analyst Angelia Phua said in a report last Thursday that Hiap Hoe is poised to 'reap the full benefits from the buoyant conditions for high-end homes and increasing demand for mid-tier homes'.

And interest in Lee Kim Tah has been stirred by frequent purchases by an investment firm linked to its executive chairman, Mr Lee Soon Teck, in the past six months.

But older dealers are keeping their enthusiasm nailed down, no doubt recalling that the last building boom - in 1999 - fell in a heap the following year as the stock market nosedived in the wake of the dot.com bust.

'Firms like Chew Eu Hock petitioned for judicial management, before getting resurrected as Hiap Hoe in a reverse takeover,' one remisier said.

But Kim Eng Research's deputy research head, Mr Tan Chin Poh, is optimistic that the rally in construction stocks this time around is far stronger.

'Those caught in the previous down-cycle have been shaken off already,' he said, although he advised investors to say cautious.

'With the recent sharp run-up, a lot of the upside has already been factored into the prices.'

[email protected]