Wednesday 26 December 2012

CONSTRUCTION


2012:  A  new  high  for  contract  flows.  Based on our tracking of jobs flow on Bursa Malaysia, Malaysia’s public-listed  contractors  had  secured  close  to  RM25bn  worth  of  contracts  as  of 9M12.  Out  of  the  total,  RM21bn  worth  of  contracts  were  local  jobs,  driven  mainly  by  the awarding of packages for the first line of the Klang Valley My Rapid Transit (KV MRT). Despite the  sterling  >100%  y-o-y  growth  in  domestic  jobs  flow,  the Bursa  Malaysia  Construction  Index has underperformed the benchmark FBM KLCI by some 13% YTD as fears cast a pall over the sustainability  of  these  Government-led  infrastructure  projects,  and  uncertainty  looms  over potential change in power after the upcoming 13th General Election.

Mega  projects  intact  despite  slight  cut  in  development  expenditure.  According  to  the Budget 2013, the allocation for development expenditure in 2013 stands at RM49.7bn, down by a  marginal,  but  expected,  2.9%  as  the  Government  tightened  its  belt  to  cut  its  budget  deficit target  from  4.5%  to  4.0%.  While  this  may  seem  negative  at  first  glance,  we  do  find  some positives  as  the  Government  reiterated  its  focus  on  some  of  the  mega  projects,  including  the RM120bn Pengerang development as well as the RM30bn Tun Razak Exchange financial zone.

Position  for  post-election  plays.  While  we  believe  the  near-term  sentiment  on  construction stocks  would  likely  be  capped,  at  least  until  the  election  is  over,  investors  could  start accumulating should there be any weakness in share prices as we step into 2013, given the:
  1.  Earnings  accretion  from  contracts  awarded  in  2012  would  likely  start  to  kick  in,especially for those involved in MRT-related jobs, as we gathered from Gamuda that construction progress is largely on schedule;

  2. Attractive  current  valuations.  Construction  is  one  of  the  few  sectors  thatunderperformed the FBM KLCI in 2012, with a simple average forward PE of 8.7x forFY13 and 7.7x for FY14;  

  3. Potential  for  more  jobs  up  for  grabs  ahead.  Among  the  usual  suspects  are  theremaining  two  lines  on  KV  MRT,  which  we  believe  will  cost  RM30bn-RM40bn,  theproposed  RM7bn  West  Coast  Expressway,  the  RM8bn  Gemas-Johor  Bahru  doubletracking, as well as the High Speed Rail Link connecting Kuala Lumpur to Singapore.Apart from that, several highway jobs including the Damansara-Shah Alam Highway,Sungai  Besi-Ulu  Kelang  Expressway,  Kuala  Lumpur  Outer  Ring  Road  as  well  asKinrara-Damansara  Expressway  and  mega  property  development  projects  such  asthe Rubber Research Institute land in Sg Buloh and the redevelopment of the Sg Besiairport base could be unveiled too.  

OVERWEIGHT.  All in, we are maintaining an OVERWEIGHT rating on the construction sector as its underperformance is unjustified given the strong contract wins YTD. Things certainly look rosier for 2013, during which more meaningful earnings contribution from works carried out on the KV MRT may be expected. We continue to like Gamuda (BUY, FV: RM4.90) among the big caps  counters,  while  there  are  ample  opportunities  in  store  for  KimLun  (BUY,  FV:  RM2.46) within our small-cap universe.
Source: OSK

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