Construction costs add pressure to project economics

From AB Capital's The Opening Bell: Three Moves

Event

Metro Manila construction material wholesale prices rose 3.6% YoY in August, the fastest pace in three years, led by concrete products at 5.4%. Fuel and lubricants accelerated to 8.1%, while steel, galvanized sheets and other inputs also recorded firmer price increases.

View

We think the read-through is mildly negative for contractors and developers because higher material costs can compress project margins where contracts are fixed price or repricing is delayed. The 2.2% January-August construction materials wholesale price index (CMWPI) average remains manageable, but the recent acceleration suggests cost pressure is becoming broader.

Catalyst

For a project with a 20% gross margin and materials equal to 50% of revenue, a 4% increase in material costs would cut gross margin by roughly 2pp if fully unhedged and not passed through. At 30% materials intensity, the hit is closer to 1.2pp.

Action

In our view, the data favor developers with stronger procurement scale, pricing power and recurring income buffers, while contractors with thinner margins face greater sensitivity. Higher construction costs also reinforce our selective property stance, as subdued residential demand limits developers' ability to fully pass through cost increases.

Disclaimer: The information, analyses, and views contained herein is based on sources which we, AB Capital Securities, believe are reliable, but is not guaranteed by us and is not to be considered all inclusive. It is not to be construed as an offer or solicitation of an offer to sell or buy the securities herein mentioned. AB Capital Securities and its Directors and Officers and/or members of their families may have a position in the securities herein mentioned and may make purchases and/or sales of the securities from time to time in the open-market and otherwise.