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Construction sector shares to scale new highs

Upbeat on the hope of an impending construction boom, considerable demand for new buildings and infrastructure such as roads and highways saw the construction sector shares on a heavy stockmarket rally by retailers on the run up to the Presidential elections and immediately after President Gotabaya Rajapaksa’s win.

The excitement has now subsided to an extent owing to profit-taking but these stocks are in their radar – especially after Mr. Rajapaksa managed to convince India to extend a US$ 400 million line of credit to improve infrastructure and economy in the country.

Most local players continue to be largely optimistic about the future of the construction industry in Sri Lanka, in large part due to the government’s ambitious spending plans, a sector analyst commented. While the government has invested heavily in developing infrastructure since 2009 – after the war, much work remains to be done, particularly in the areas of road development, he said.

As per published statistics, more than 90 per cent of construction activity through 2012 was state-led. Now saddled with an economy where growth has slowed to a five-year slump of 1.6 per cent in the quarter ended June, and which has a debt level perched at 83 per cent of GDP, the new government is to restart abandoned projects with the same zeal pre-2015.

The Ministry of Transport and the Ministry of Higher Education and Highways in those days for example, have carried out a substantial amount of road and expressway development and refurbishment. The government in 2010 and 2014 built around 160 km of new expressways and 240 km of new roads, most of which fell under the umbrella of its 10-year National Road Master Plan, which was launched in 2007, another analyst said.

Sri Lanka still has some way to go in the infrastructure sector which augurs well for the construction industry and investors are set to witness a strong construction sector growth in 2020 with the expected stabilisation in the political and economic front with the cut in corporate taxes, VAT and NBT to boost its growth, analysts say.

The construction sector could restart energising the overall economic growth from 2020 due to the lower corporate tax rate of 14 per cent for the sector and ease in VAT and cancellation of NBT with continued input from private sector led infrastructure projects and lower interest rates steering the home builders market. As such, firms such as Access Engineering PLC’s order book will be augmented by revenue which could flow in through sub-contracting work from the Port City and Chinese-funded phases of the Central Expressway where Phase III will begin next year.

The JICA-funded Light Rail Transit Project Phase I and airport terminal expansion project is also in the pipeline for the company.

Along with the Ratnapura Expressway, Chinese-funded Polonnaruwa water supply project, expansion of Kadawatha Nittabuwa Road Project and construction of flyovers in Colombo and Kandy, the company will turn in better profits, analysts believe.

For real boost in the construction sector, there has to be a retail housing construction boom, some analysts opine. Initially in the first three months of next year, F&B related firms will do well as demand for those will augment and consumer demand for vehicles and housing will come next, Dimantha Mathew, Head of Research at First Capital told the Business Times. “This will happen quarter by quarter and we expect that construction sector boom will happen in about nine months’ time,” he added.