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:
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:
- 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;
- 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;
- 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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