Mixed picture for construction stocks as builders grapple with delays, manpower shortages and more costly materials while material suppliers have strong order books to cheer about.
The construction industry in Singapore is restarting its engines after the sector was forced to a standstill during the pandemic as borders shut and the flow of workers and materials was disrupted amid overall economic uncertainty.
Almost overnight, the construction sector, which is typically a sector with thin margins, plunged 38.4% in 2020, before recovering 20.1% in 2021 with the gradual reopening of borders and the resumption of building activity. In 2022, the sector expanded a further 6.7%, becoming the sixth-highest sectoral contributor to Singapore’s overall GDP growth for the year.
In 2Q2023, as Singapore’s export-oriented manufacturing sector endured yet another double-digit slump, the services and the construction sectors have held on as growth drivers, with the latter rising 6.8% y-o-y, just behind the accommodation sector’s 13.0% y-o-y growth and the real estate sector’s 12.0% y-o-y growth.
According to a 2Q2023 report by construction consultancy service provider Linesight, Singapore’s construction output is expected to expand by 5.4% in real terms in 2023. The industry can also look forward to the stabilisation of commodity prices following the Ukraine-Russia-induced spike as well as the easing of labour shortages.
Traditionally, construction demand in Singapore has been tied to significant public sector works, with significant projects such as the North-South Corridor, a largely underground expressway meant to help ease some pressure off the Central Expressway. The Building and Construction Authority (BCA) is forecasting total construction demand to range between $27 billion and $32 billion this year.
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Yet, underneath this huge multi-billion headline number, there has been a stark divergence in the fortunes between contractors and materials suppliers, amid the sector’s overall improvement.
Woe for contractors
On one hand, contractors are still grappling with the effects of the delays, labour shortages and material prices.
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For instance, construction and property development group Koh Brothers Group K75 on Aug 5 reported a loss of $16 million in 1HFY2023 ended June despite the higher revenue of $196.6 million mainly due to the higher costs for materials, labour and subcontractors. The loss, which was a reversal from the earnings of $5 million in the 1HFY2022, also suffered from the lack of one-off disposal gains in the same period the year before.
Wee Hur Holdings E3B , another construction company, reported a loss of $21.8 million in 1HFY2023 ended June compared to $6.5 million in earnings the year before. Similarly, the loss was blamed on higher costs for materials, labour and subcontractors.
Lum Chang L19 , meanwhile, reported net losses in FY2023 ended June more than doubled to $28.7 million from a year ago. Despite revenue from its construction segment growing by 9% y-o-y to $365.9 million, it incurred higher costs too.
The higher costs were not just limited to steel and concrete. As construction workers were reintroduced at record levels, contractors were forced to pay more to house them as the supply of beds could not keep up with demand.
In 1HFY2023 ended June, dormitory operator Centurion Corporation OU8 reported earnings of $38.3 million, up 16% y-o-y. Centurion estimates that there were about 30,000 more work permit holders who require approved dormitory beds than available beds as at May.
Good times for suppliers
Material providers such as Hong Leong Asia H22 , BRC Asia BEC and Pan-United Corporation P52 , are generally painting a rosier picture than the contractors.
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Hong Leong Asia (HLA) reported a 27.7% y-o-y decline in earnings to $30.8 million in 1HFY2023 ended June. This was mainly due to the absence of a $10.6 million one-off gain from the disposal of held-for-sale assets in the 1HFY2022 as well as unfavourable forex and higher financing costs. Without the one-off gain, the group’s earnings would have declined by 3.7% y-o-y.
However, HLA’s building materials segment reported higher revenue of $306.3 million, up 8.6% y-o-y, and profit after tax of $31.0 million, up by 8.3% y-o-y. The unit says its order books in the precast and ready-mix concrete (RMC) segments remain “strong”.
Steel supplier BRC Asia, which HLA has a 20% stake in, reported earnings of $22.6 million for the 3QFY2023 ended June, up 11% y-o-y, thanks to “strong local demand”. As at June 30, it has built up an order book of $1.34 billion to be fulfilled in the coming five years.
Union Steel saw FY2023 ended June 30 earnings up by some 52% y-o-y to $11.1 million on the back of a 34% y-o-y growth in revenue to $107.3 million. The improvement was led by its engineering and scaffolding segments serving the construction sector. This revenue improvement came about even as softening metal prices led Union Steel’s metals segment to report an 8% y-o-y decrease in revenue to $50 million in FY2023.
Pan-United Corporation, which supplies specialised RMC, reported earnings of $15.9 million for the 1HFY2023 ended June, up 18% y-o-y. It was able to eke out better gross margins of 21.3% too, up 1.6 percentage points y-o-y, thanks to a more profitable product mix.
If these materials suppliers can have their way, they can expect steady growth going forward. In an interview with The Edge Singapore, HLA’s chief investment officer Patrick Yau noted that the industry’s catch-up will take “some years” because of the backlog. In a separate interview with The Edge Singapore, BRC’s CEO Seah Kiin Peng added that while there has been a “marked improvement” in site movement, a full recovery is expected to take time (see Page 10).
While some contractors have announced contract wins recently, from the perspective of PhilipCapital’s Peggy Mak, that may not be all good news for them. “You hear contractors getting bigger orders but maybe there’s not so much to be happy about as they face certain cost pressures, labour cost and not having enough space in dorm rooms,” says Mak, speaking at a recent forum.
“To play this sector, maybe get into Pan United or BRC Asia,” says Mak, who identifies these two companies as market leaders in RMC and construction steel respectively, and which there is growing demand. “Supply to public construction contracts are protected by price fluctuation clauses such that they can pass on the higher costs to the customers, hence insulating them from swings in prices,” Mak explains.
Pan-United expects the volume of construction activities to rise in the 2HFY2023 with “buoyant demand from public and private housing developments and infrastructure projects,” says the analyst.
Mak adds that the company’s higher gross margin is sustainable due to “a higher mix of products which offer low-carbon solutions to the customers and higher fees from batching services offered to HDB construction work”.
Looking ahead, she expects the construction sector to “be busy” next year, with many contractors sitting on record order books to be completed over the next three to five years. “We think the construction sector will see output grow by 20% in 2024 as they booked more progress payments after jobs are completed.”
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