Jan 31, 2017

Malaysia’s Construction Sector: Which Stock ?

Hitting the ground running with new infra jobs

■ LRT 3’s new May award timeline adds to the sector’s infra catalysts.
■ Tender launch for the new BRT KL-Klang is part of the larger est. RM18bn plan.
■ Port and marine infra jobs look likely to gain more traction over the medium term.
■ We project a rebound in job award momentum from 2Q17 onwards.
■ Emerging order book drivers for top picks Gamuda and Muhibbah Engineering.

New infra developments for rail and bus transit
According to Prasarana, it will start awarding major contracts for the 37km Light Rail Transit 3 (LRT 3, Bandar Utama-Klang) project in May. Our checks indicate that there are likely 17 civil works packages up for grabs, including a 2km tunnel. The RM9bn estimated cost could be revised upwards. Also, recently, a tender and request for proposal (RFP) exercise was launched for the new Bus Rapid Transit (BRT) KL-Klang line as part of the BRT master plan, which we estimate to be worth a combined RM18bn.

New BRT KL-Klang is high priority; likely RM1.5bn-2.8bn in value
BRT KL-Klang’s tender launch represents the second of a total 12 BRT packages proposed in 2015 but does not include the additional BRT Sabah proposal that came about in 2016. It was planned as a 34km line, which could cost between RM1.5bn and RM2.8bn by our estimates. Sunway Holdings, via listed construction arm Sunway Construction (NR), was awarded the first RM454m BRT pilot project in Sunway in 2013. We believe Sunway has a big advantage in the new BRT tender.

malaysia infrastructure projects 
Port and marine infra contracts a trump card for Muhibbah
Apart from public transport, port and marine infrastructure is an underappreciated segment of the sector in which Muhibbah is a major player, having completed/currently undertaking jobs for Westports, Northport and the Port of Tanjung Pelepas (PTP). The RM12.5bn Kuala Linggi International Port (KLIP) in Melaka and the multi-billion ringgit Carey Island port terminal in Pulau Indah are recent key examples of how port capacity expansion and greenfield port/marine-type projects add to the sector’s infra growth.

LRT 3 is on Gamuda’s and IJM’s radars too
While, over the medium term, Gamuda has its sights on MRT 3, HSR and the ECRL, there is also a fairly good chance that it could secure a package from LRT 3 and Pan Borneo Sabah. For IJM Corp, it was one of the prequalifiers of LRT 3 but remains selective. Securing a potential RM600m-800m LRT 3 package will boost Gamuda’s and IJM’s RM8.2bn-8.9bn order book by 7-11%. A more lucrative win for Gamuda in 1H17 could be the Gemas-JB job; it is targeting a larger RM1bn package.

construction sector stocks
Award season to regain momentum from 2Q; stay Overweight
The rollout of new infra jobs suggests more upside to the 9M16’s RM47.5bn value of infra jobs awarded. We expect the sector’s award season to regain momentum from 2Q17, suggesting a buying opportunity for selected stocks under our coverage. Maintain Overweight. For exposure to the rail theme, Gamuda remains our top big-cap pick. For the small/mid-cap space, we like Muhibbah Engineering due to its still-attractive valuations, niche in marine infra and US$ earnings. Downside risk is job delays.

source: CIMB Research – 26/1/2017