Boring? No growth? Low margin? This sector has bright prospects in 2025, says CGS

When it comes to investing, construction stocks often are seen as boring, no-growth, low-margin plays.

But CGS International’s report this month challenges this stereotype, showing that at least some of these stocks might be more dynamic and rewarding than they appear.

With strong project pipelines and attractive dividend yields, construction stocks are looking like a hidden gem.

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Why Construction Stocks Deserve a Second Look

The construction sector in Singapore has been thriving. In the first nine months of 2024 (9M24), construction output rose by 8% year-on-year (yoy), driven by:

Public Sector Investments: Projects like Tuas Mega Port are bolstering demand.
Residential Developments: A surge in Build-To-Order (BTO) flats is supporting growth.
Labour Recovery: Post-pandemic improvements in workforce availability have eased operational challenges.
Mega-Infrastructure Projects: Developments like the Cross Island Line are expected to sustain momentum into 2025.

"We note that YTD new contracts awards saw a general pickup, with both 3Q24 and 9M24 wins up strongly by 55% and 34% yoy respectively.
We believe some of this growth was attributed to large projects (e.g. expansion works for Resorts World Sentosa and Marina Bay Sands) and
ramp-up in public residential projects (build-to-order flats). We think project pipeline in 2025F should be bolstered by mega-infrastructure
projects (Changi Airport Terminal 5, Tuas Mega Port), continued increase in public residential supply, and rail projects (e.g. Cross Island Line)."
-- Ong Khang Chuen, CFA, analyst

The Building and Construction Authority (BCA) projects total construction output for FY24 to reach between S$34 billion and S$37 billion, with this momentum expected to carry into 2025.

Key Trends Shaping the Sector

Strong Demand Across Segments: Public infrastructure and private residential projects continue to drive activity.
Deleveraging by Companies: Many firms have reduced debt significantly, creating room for growth opportunities.
Mergers and Acquisitions (M&A): Companies like BRC Asia and Pan-United Corporation are exploring acquisitions to strengthen their market positions.

CGS International’s Top Construction Stock Picks

CGS has an Overweight rating on the construction sector, highlighting three standout companies:

1. BRC Asia (BRC)

Dividend Champion: BRC offers an impressive estimated dividend yield of 8.2% for FY25F, making it one of the most attractive income plays in the sector.
Financial Strength: The company has deleveraged significantly, reducing borrowings by 35% yoy in FY24.
Growth Potential: Management is cautiously exploring overseas M&A opportunities while maintaining a high dividend payout ratio of around 70%.

Key catalysts include higher offtake volumes and earnings-accretive acquisitions.

"We maintain BRC as our top pick given its attractive 8.2% FY25F dividend yield and undemanding valuation of 8.5x CY25F P/E," says CGS analyst Ong Khang Chuen, CFA.

2. Pan-United Corporation (PanU)

Infrastructure Exposure: PanU benefits from its significant role in Singapore’s infrastructure projects.
Sustainability Focus: Its green concrete initiatives align with growing environmental concerns, adding an ESG angle to its investment case.
M&A Opportunities: With a stronger balance sheet, PanU is well-positioned for inorganic growth.

3. Hong Leong Asia (HLA)

Undervalued Proxy for Growth: HLA is seen as an underappreciated proxy for the construction upcycle in Singapore and Malaysia.
Valuation Upside: The stock trades at a low valuation relative to peers, with potential upside from its BMU (building materials unit) unit and China Yuchai division's recovery in engine sales.

Risks to Watch

Despite the positive outlook, there are risks that could impact the sector:

Project delays due to engineering or architectural challenges.
Rising material costs or supply chain disruptions affecting margins.
Broader economic uncertainties or geopolitical tensions dampening investor sentiment.

Full report here.