Maintain OVERWEIGHT on Construction as we see more contract
awards and news flows coming out in 3Q12. This is premised on the upcoming
Budget 2013 in September 2012 and likely front-loading of contract awards prior
to the upcoming general election. Assuming general election takes place in
August or November 2012 (based on the school holidays timetable), the risk
premium for construction will definitely be higher, and thus stock selections
would be crucial for investors who wish to have exposure in the sector. We
opted for fundamentally strong contractors with a strong balance sheet, as well
as, being potential beneficiaries of the
upcoming KLFID and
EDTP Gemas-JB projects
like WCT (OP;
TP: RM3.92) and Gamuda
(OP; TP: RM4.12).
We expect more news and contract awards from the KLFID
projects (foundation works), EDTP Gemas – JB project and High Speed Train (HSR)
project in 3Q12 and we reckon WCT and Gamuda will be in the limelight. Our Top
Pick for the sector is WCT (OP; TP: RM3.92) and Gamuda (OP; TP: RM4.16).
Contractor’s 1Q12
results within expectations. Most of the big cap contractors under our coverage
have reported in-line 1Q12 results,
except for MMC given its escalating operating cost incurred during the
period. The sector’s underperformers mainly comprised of small contractors like
Bina Puri, Fajarbaru and TRC. This is
mainly due to the delays from the ongoing LRT extension works, which are
already 9 to 12 months behind schedule.
What to expect for
2Q12 earnings? The 2Q12 results will
be announced in August 2012. We believe that the downgrades during 1Q12 result
season have already reflected the potential delays in revenue recognition for
most small to mid cap contractors. On a positive note, we understand that the
LRT extension project has received full Development Order (D.O) from the state
government in June 2012 and the construction activities are expected to quickly
pick up pace in 2H12.
New mega project
awards in 2H12. Based on the recent
news flows, Suruhanjaya Pengangkutan Darat (SPAD) is committed to invest about
RM160b in improving the railway system in Malaysia until 2020. Based on that
amount, we believe that this will include projects like the MRT circle line
project, EDTP JB-Gemas (RM7b) and High Speed Railway (HSR) (RM30b). Among these
projects, the imminent project for tenders will be EDTP Gemas-JB as we believe
that the government is at the advance stage of discussion to finalize the
details. For HSR, we understand that the project is now slated for completion
by 2018 and we expect that there will be more news flows rather than tenders
until end of the year (2012). We understand the timeframe for MRT circle line
to execute or award the project is 2Q13,
meaning, the finalized alignment should be announced in 2H12.
3Q12 will be
challenging for smaller contractors. We believe there are still pocket of weaknesses
due to their likely softer 2Q12 earnings (scheduled release in Aug-12) given
delays in execution. This may drag down investors’ sentiment on small cap
players. However, we still remain positive in the medium term as earnings will
flow through to 3Q12 earnings onwards. We
continue to like Fajarbaru (OP; TP:
RM1.27), Bina Puri (OP; TP: RM1.24), TRC (OP; TP:RM0.82) and MRCB (OP;
TP:RM2.71).
Budget 2013
expectations. Budget 2013 may not
expect major project announcements if GE comes after Budget 2013. This is
mainly due to the election budget where the government will likely dish-out
more goodies to the “rakyat” and perhaps, more to people-centric policies. We
think that there is lot of execution activities needed for the existing and
upcoming ETP projects which should provide ample growth for contractors in the
next 1 to 2 years. Should there be any major projects announcements, we believe
that they will likely be based on Public-Private-Partnership (“PPP”) which is
likely to benefit the big boys due to their strong balance sheet positions ie:
WCT, Gamuda, MMC and IJM Corp.
Source: Kenanga
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