Jul 25, 2017

Construction Sector – Malaysia

Railway-related Jobs To Dominate In 2H17

We expect construction job awards to gain momentum in 2H17 after the lull period in 1H17 due to seasonal factors. In the near term, key events to look out for include: a) awards for the RM9b LRT3, b) groundbreaking of the RM55b ECRL, and c) tabling of the pre-election Budget 2018 in October. We prefer infrastructure construction beneficiaries, including Ekovest, Gamuda and IJM Corporation. We also downgrade Kerjaya Prospek post the share-price rally. Maintain OVERWEIGHT.

UOBKH’s construction universe outperformed FBMKLCI. Ytd, our construction universe recorded 25.7% growth against the FBMKLCI’s 7.2%. The key performers in the sector include Kerjaya Prospek, Ekovest and Sunway Construction. Kerjaya continues to be on an uptrend given its continuously strong earnings growth that is supported by commendable margins.
Ample re-rating catalysts. First, we believe the Economic Transformation Programme (ETP) would continue to support newsflow momentum and contract awards in the short to medium term. Second, most of the companies under our coverage still have sizeable orderbooks that can sustain earnings going forward. We expect newsflow for a few notable mega projects to excite the sector, such as: a) groundbreaking of the ECRL, b) awards for the RM9b LRT3 job, and c) subcontracting works for the Gemas-JB double tracking job. Cumulatively, these three projects could provide the sector with at least RM70b in construction jobs.

Maintain OVERWEIGHT; prefer beneficiaries of infrastructure spending. Companies with a good track record in earnings delivery and strong orderbook replenishment are our preferred picks. These include Ekovest (BUY/Target: RM1.55), Gamuda (BUY/Target: RM6.00) and IJM Corporation (BUY/Target: RM3.95). From a risk-reward perspective, we think Ekovest would outperform in the near term, with its key catalyst being the signing of its DUKE2A concession agreement by year’s end. Gamuda’s catalyst would be further contract wins, which would support its multi-year earnings growth target. For East Coast plays, both IJM Corp (BUY/Target: RM3.95) and Gabungan AQRS (NOT RATED), have significant business exposure in the region, particularly in construction and infrastructure (IJM’s Kuantan Port). We like Gabungan AQRS for its turnaround story, where its construction orderbook is at its all-time high with margins expected to be significantly above the historical record.
Take profit on Kerjaya Prospek post 66.4% returns ytd. We downgrade Kerjaya Prospek to HOLD with an unchanged target price of RM3.69, based on 14x 2018F PE. At current levels, we think the market has priced in the growth potential and anticipated contract wins, which may be forthcoming in the near term. Nevertheless, there could be potential upside to our fair value should the company secure more than RM1b in new orders this year (ytd wins at RM380m). Since our initiation back in Jan 16, Kerjaya’s share price has

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RM12.9b worth of jobs awarded in 1Q17, more to come in 2H17. To recap, 2016 was a strong year in terms of new job orders, which topped RM176b, driven by the rollout of the MRT Line 2 and Pan Borneo Highway contracts. According to the Construction Industry Development Board (CIDB), total job orders in 1Q17 totalled RM12.9b, driven by the private sector. Historically, job orders tend to be seasonally stronger in 2H due to festivities in the early part of the year.
Pre-election budget tabling should provide further catalysts for the sector. The tabling of Budget 2018, which would be the last budget before the general elections, will take place on 27 Oct 17. Quoting the Prime Minister, the upcoming budget will continue to have “people-centric” projects, which would include the development of good public transportation systems, signalling that the spending on infrastructure projects is expected to continue in the medium term.
Railway-related projects to take the limelight. For the next 3-4 years, railway jobs would continue to dominate the sector’s growth. This would be driven by LRT3, ECRL, HSR and potentially MRT Line 3. In the near term, the key events to look out for include the awarding of the RM9b LRT3 project (possibly in the next 2-3 months), groundbreaking of the ECRL (expected in early-August) and the opening of the tender for the AssetCo for the HSR (expected by this year-end).
● Enough jobs to sustain earnings for next 3-4 years. These mega infrastructure contracts are large enough to support earnings growth in the sector for at least another 3- 4 years. Also, most of the key companies in our universe still have ample orderbooks, which can still sustain earnings should the awarding of these projects be delayed. We expect construction companies under our coverage to report market-weighted average EPS growth of 15.2% in FY17-18, underpinned by healthy construction books. So far, outstanding orderbooks for companies stand at healthy levels of RM2.5b-13.2b each, implying 2.6-14.0x of their respective last financial-year revenues.

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● Contract awards for major infrastructure projects.

● Key risks include: a) potential cut in government spending, and b) delay of project surged 114.8%.

source: UOBKayhian – 25/07/2017