Building contracts to persist this year

by **Cals** Mon 13 Jan 2014, 18:18

Business & Markets 2014

Written by Maybank IB Research

Monday, 13 January 2014 09:57

Construction sector
Maintain overweight: Construction contract awards remained strong in the first nine months of 2013 (9M13) and will support sector’s earnings in 2014. Construction job flows will also persist in 2014, driven by both public and private spending on infrastructure, property, and onshore oil and gas (O&G) related projects.

News flow should stay positive on major infrastructure project awards and corporate activities involving water and highway assets. Valuations are undemanding as the sector trades at 12 times 12-month forward price-earnings ratio, lagging the KLCI’s 15 times. We stay “overweight” the sector with our top pick being IJM Corp Bhd.

The first full-year construction of the Klang Valley Mass Rapid Transit (KVMRT) Line 1 in 2013 is a testament to Malaysia’s execution ability, boosting confidence. However, fiscal prudence on the part of the government raised uncertainties on the timing of the implementation of other projects during the year. Continued delays in several key projects have also led to disappointment.

Nevertheless, job awards in 9M13 were still sustained at RM67 billion (-5% year-on-year), mainly driven by private sector investments and non-residential projects.

Sentiment will be lifted by major projects that are inching closer to crystalisation including the KVMRT Line 2, West Coast Expressway, Kuantan Port expansion and Gemas-Johor double-track rail. We also expect construction jobs to flow from the government’s development expenditure on infrastructure and rural development allocated under Budget 2014.

Upcoming key O&G projects and government land developments will bolster construction works. Companies with overseas exposure could boost their order books on the infrastructure boom in the Middle East.

We expect the sector to be abuzz with corporate activities. Construction companies are looking to monetise cash-generative infrastructure assets including highways, ports, power plants and water treatment plants.

Gamuda Bhd and IJM Corp, the main highway concession owners listed in Malaysia, are mulling over the monetisation of their concession assets via separate listing or business trust.

The KL Construction Index surged 17% in 2013, outperforming the KLCI’s 10% gain. All construction stocks under our coverage are “buys” with strong outstanding order books and/or diversified income sources from property, building materials, or infrastructure businesses spurring earnings growth. IJM Corp is our top pick for its potential major construction order book replenishment and strong unbilled property sales.

Cahya Mata Sarawak Bhd is our thematic play on accelerating developments in Sarawak’s Corridor of Renewable Energy. — Maybank IB Research, Jan 10

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This article first appeared in The Edge Financial Daily, on January 13, 2014.