CONSTRUCTION - The Research Team Kenanga

CONSTRUCTION
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The Research Team
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Tel: 603-2713 2292
We are upgrading the Construction Sector to OVERWEIGHT, from NEUTRAL,
following our Strategy report on post-13th General Election (GE13) on 6th May
2012. The sector upgrade is premised on 3 investment merits; 1) clear orderbook
replenishment visibility as the government will resume all the previous plans under
ETP and 10MP, 2) brighter earnings growth as orderbook will continue to progress,
3) risk premium no longer valid since the GE13 outcome favors the contractors.
Hence, we expect the sector’s valuation to revert to its fundamental value. Our top
picks for the sector are Gamuda (OP; TP: RM5.20), MRCB (OP; TP: RM2.08) and
TRC Synergy (OP; TP: RM0.72).


Construction stocks reacted positively after GE13. Barisan Nasional (BN) coalition party
won the GE13 with 133 seats out of total of 222 parliamentary seats. This accounts for 60% of
total parliamentary seats. This gives the coalition party another 5-year term to govern Malaysia
implying a ‘business as usual’ environment for contractors. So far, the construction stocks have
reacted positively on the news. KL Construction Index hit its 52-week high yesterday and has
gone up by 11% since the earlier this week. Top gainers in KL Construction Index yesterday
included Gamuda (+28 sen), IJM Corp (+13 sen), and WCT (+12 sen). This certainly tells us
that investors’ confidence on the sector has regained as they are no longer imputing any risk
premium, which is typically attached to political uncertainties.

Veil of uncertainty is gone, positive news and contract flows to continue. It is rather
obvious that with the GE13 outcome, we can expect a resumption of mega infrastructure
projects under plans like ETP and 10MP. Earlier planned contracts will be awarded and while
timing of awards are not clear, we do expect this to take place soon, which provides a clear
orderbook replenishment visibility for contractors. The sector will be driven by positive news
and contract flows, especially on public-friendly projects’ rail-infrastructure (i.e. MRT Line 2 or
3, High-Speed Rail, Gemas-JB EDT, Klang Valley EDT). Hence, we expect the construction
sector to continue to register robust growth in the medium term of up to 5 years.
Orderbook continues to run, thereby provide clear earnings visibility. We estimate
that the listed contractors have a running orderbook of c. RM45b or more. With no changes to
the incumbent government, we expect the progress of orderbook to run smoothly for the next
3-4 years at the very least, which does provide us with brighter earnings visibility as delays in
earnings will be reduced.

Valuation should converge with the sector’s boom cycle. The construction GDP swelled
by double-digit 18.5% in 2012 and is estimated to grow by 11.1% in 2013, making these two
years one of the first double-digit growth recorded since 2000. Hence, we believe the
construction stocks’ valuation should revert to their 5-year average levels from their trough
valuations (more than 1-Std Dev below of 12x – 14x for big cap and 5x – 6x for small-mid
cap). So, we are now benchmarking large and small-mid cap construction stocks under our
coverage against the sector’s 10-year Fwd PER mean of 16x – 18x and 7x – 9x, respectively,
and have rolled-forward our valuation basis to FY14E earnings. Hence, this resulted in a
upgrade in our TPs, on average by +16%. While maintaing Bina Puri (UP; TP RM0.40), Fajar
Baru (OP; TP RM0.51), MMC Corp (OP; TP RM2.80) and WCT (OP; TP RM2.43), we revised
upwards our TP for Benalec (OP; TP RM2.08), Eversendai (OP; TP RM1.71), Gamuda (OP; TP
RM5.20), IJM Corp (OP; TP RM6.25), MRCB (OP; TP RM2.08), Naim Holdings (OP; TP RM3.70),
and TRC Synergy (OP; TP RM0.72). Kindly see table of Old and New Target Prices.

Top picks. That said, we prefer large cap construction stocks that have big exposure in the
rail-infrastructure projects, such as Gamuda (OP; TP: RM5.20) and MRCB (OP; TP: RM2.08). In
the small-mid caps space, we prefer TRC Synergy (OP;TP:RM0.72), due to its status as the
only Peninsular contractor that is able to ride on the Sarawak’s robust SCORE given it holds the
UPK license.



As the government economic plans continue, we see a lot of opportunities emerging given a slew contracts
awards to be clinched by contractors in the foreseeable future (at least for the next 5 years). These contracts
will come from the remaining ETP and 10MP projects which include:

Infrastructure - Railway. The government has so far shown great commitments in developing railway infrastructure. It
has committed billions of Ringgit investment in building railways including; double tracking, LRT extensions (RM7.0b) and
MRT1 (RM23b). Going forward, we understand the government will continue to expand and upgrade the country’s railway
tracks. The projects, among others, are: MRT2 and MRT3 (both combined worth about RM60b), KL – Singapore High Speed
Railway (RM30b), Southern Double Track (Gemas –JB) (RM8.0b), KVDT upgrades (RM850m), LRT3 extensions (RM5.0b)
and East Coast Region Railway (RM30b). These could all amount to a total contract size of RM104b.


Infrastructure - Highway. At the same time, Malaysia is poised to expand the expressway. Just a few days after New
Year of 2013, West Coast Expressway Sdn Bhd (WCESB) (80:20 of IJM:Keuro) been appointed as a concessionaire of the
RM6.0b West Coast Expressway (WCE) spanning from Banting- Taiping. Other highway project also saw Ahmad Zaki
Resources Bhd (AZRB) win of the second circle highway of RM1.5b KLORR highway. Moving forward, there will be more
highways to be built especially in the Klang Valley such as Kinrara-Damansara Expressway (Kidex) (RM2.5b), SUKE Highway
(RM2.5b)and DASH Highway (RM2.5b). In addition, we also understand that the government has already approved to build
the RM7.0b of the Pan Borneo highway that will link Sabah to Sarawak.


Infrastructure – Water. It is widely reported that the water treatment plant will be built in Hulu Langat to complete the
Pahang-Selangor Raw Water Transfer that is currently on-going a 65% completion (tunnelling). The project is estimated to
cost RM3.9b. However, it is only safe to


Mixed Development projects. To recap, there are few mixed development projects that are already in the pipeline such
as Tun Razak Exchange (RM20b) and KWASA’s Rubber Research Institute land at Sungai Buloh (RM10b). Also, WCT secured
a package of earthwork in TRX worth RM169m in April 201 vs. the total earthwork packages which has an estimated worth
of RM1.2b – RM1.5b.