Jan 27, 2014

Theme: Malaysia Construction Stock Picks

•  Investors should stick to MRT-related proxies like Gamuda and MMC; the government is committed to ensure rollout of the entire project. Line 1 (Sg. Buloh-Kajang) has reached 30% completion and is on track for full handover by 2017.
•  2014 will be the year for IJM to play catch up to Gamuda, as we approach the award of WCE which will transform four of its business divisions and double its RM2.5bn order book. Financial close for WCE is expected by 1 Jan 2014. The market continues to assign negligible value to IJM’s construction business.
•  Muhibbah remains our small cap pick, as it is the cheapest proxy to the infrastructure and oil & gas related jobs. Besides the RM62bn RAPID project, we think Muhibbah is poised to clinch port related jobs in Singapore and other Petronas fabrication jobs, while its shipyard division is also on track to triple its current order book

Muhibbah Engineering Buy at RM3.10 Target Price

1)  Petronas licence, the game changer. With the recently awarded licence by Petronas, the Group can now bid for future O&G-related onshore and offshore jobs, particularly on construction and fabrication works. This enables a strong inflow of contracts with better margins, and improves its chances of securing international jobs. Hence, such major exposure to the O&G sector could transform Muhibbah into a valuable O&G proxy with diversification into other businesses as well.
2)  Strong recurring income. The Group’s earnings are also supported by its crane manufacturing (Favelle Favco), shipyard and concession segments which could provide favourable recurring income. Having its niche in manufacturing customised cranes, Favelle Favco has been receiving consistent orders particularly from its returning customers. Meanwhile, its Cambodian airport concession has been providing increasing cashflow each year, largely supported by the strong tourism
growth in the country.
3)  Cheapest O&G related stock. Valuation is attractive at FY14-15 PE of 6-7x, backed by strong ROE of 21-22% and estimated double-digit forward annual EPS growth. We like this stock for its significant exposure to O&G, while gaining
earnings diversification from other segments. BUY at RM3.10 TP

Gamuda Buy At RM5.40 Target Price

1)  Still the best MRT proxy. Gamuda remains the most leveraged proxy to the MRT project. The next positive catalyst is cabinet approval and PDP appointment for Line 2. The revival of the southern double-tracking project will help fill the potential earnings gap for construction in FY16. Both FY14 and FY15 will be peak years for MRT Line 1 for Gamuda, while Line 2 will only contribute in FY17.
2)  Replenishing its land bank. The post-budget announcement of property cooling measures has not been materially affected Gamuda’s property sales. 1QFY14 property sales were RM575m (+72%) and are on track to beat its RM1.9bn sales target for FY14. There is concern of a potential slowdown at Iskandar due to over-building and higher minimum purchase limit of RM1m per property for foreigners. But the impact should be mild on Horizon Hills which appears to attract more genuine buyers, and the minimum price of the properties there is RM800k. IJM is also finalising three key land deals in Sabah, Iskandar and Klang Valley, with RM8bn in combined GDV.
3)  BUY, TP RM5.40.Valuations are still tracking mean levels and should rerate once there is more newsflow on MRT Line 2 and southern double tracking. We still expect substantial special dividends from the sale of Splash but investors may have to wait longer.

by HWDBS Vickers