Construction - Script postpones to after election

We reiterate our NEUTRAL recommendation on the construction sector following last week’s Budget 2013 announcement. As expected, there were no new projects mentioned in the budget and hence we conclude that the government intends to focus more of its attention on the execution and the viability of the projects like TRX, Petronas RAPID (“RAPID”) and MRT. The government has also introduced 10-year tax incentive for investors who interested in setting up new offices in TRX and 100% tax exemption in for companies that participate in developing RAPID. The tax incentives will be a useful tool to attract owners’ participation in the project thus speeding up the contract awards for the construction and earthwork scope which could benefit WCT and IJM. On the other hand, we see SENDAI (MP; TP:RM1.52) to be the prime beneficiary for the supply of the building structures due to its experience as a highrise building structure contractor. The earthwork for TRX is likely to be awarded by end of 2012. The RAPID development will benefit WCT (OP TP RM: 3.09) and IJM (MP; TP:RM5.00) while the incentives for the oil and gas industry will benefit BENALEC (OP; TP:RM1.71) due to its Johor land development, i.e. the Tanjung Piai and Teluk Pengerang land reclamation projects. The other infrastructure projects mentioned in the Budget were not material and are likely to benefit the smaller construction players  only like KIMLUN (OP; TP:RM1.77), FAJAR (MP; TP:RM0.71), BPURI (MP; TP:RM0.80) and GBGAQRS  (Not Rated).  Our Top Picks remained unchanged, i.e. WCT (OP TP RM: 3.09) to benefit from the TRX and RAPID earthworks packages. 

No kicker with any catalysts likely in the post-election period only.  As expected, the budget announcements came in within our expectations as we had not expected any major infrastructure announcements. We are fairly neutral to slightly positive on the budget announcement for the construction sector as we see the government intention is now more to focus on the execution and the viability of the projects like TRX and RAPID via introducing more tax incentives. In the near term, we opine that the sector’s developments will likely be muted with major contract awards to take place after the upcoming general elections. Such contracts include WCE Expressway, revival of the East Coast Expressway, the HighSpeed Train project, Double Track Railway, Langat 2 and MRT Line 2 & 3. We believe that these projects will be the next re-rating catalysts for the sector. Based on the moderating growth in the development expenditure at 11% as compared to 15% in 2012, we reckon that is unlikely that the government will execute other mega projects in 2013 and the execution of MRT, TRX, RAPID, WCE Highway will be able to support the growth in 2013. 

Tax incentives in TRX and RAPID to benefit contractors. For TRX, foreign investors and developers are entitled for tax exemption, stamp duty exemption and allowance for industrial building for a 10-year period. Meanwhile, for oil and gas players that are involved in RAPID and activities like refining, storage and trading, they are entitled for a 100% income tax exemption for the 10 years. The incentives will be useful tools to attract investment in the development of the two projects and hence speeding up the contract awards for their infrastructure works. 

Entry Point Projects (EPP) and rural infrastructure projects.  There was a repetition of announcements like the River Of Life for Klang River beautification project, which is likely to benefit MRCB.

Apart from that, the RM300m water pipelines and sewerage projects will likely benefit the small contractors and the developments are likely focus on rural areas.   

Revival of abandoned housing projects, PRIMA housing and Rakyat Housing Program (PPR). Thus far, BPURI (MP; TP:RM0.80) has executed some of the revival of abandoned projects in Kuala Lumpurm and we think that other small contractors will also benefit from the RM100m allocated for these projects like FAJAR (MP; TP:RM0.71) and GBGAQRS (Not Rated)  due to its strong track record with governmentrelated projects. We see Kimlun as the prime beneficiary for PPR and PRIMA projects as the government is promoting the use of IBS for the houses. 

Conclusion. We see the impact of Budget 2013 on the Construction sector to be fairly muted due to the absence of catalytic projects. The elections risk remained intact and we do not expect 4Q12 to be an exciting quarter for the sector. The next re-rating catalyst for the sector will only emerge post the  13^th General Election. We hence reiterate our NEUTRAL recommendation on the sector with our Top Picks being WCT (OP; TP RM: 3.09) and GAMUDA (OP; TP RM4.13).

Source: Kenanga