Feb 18, 2014

Malaysian Construction Stocks Outlook

Looking forward
The outlook for Malaysian construction stocks is still bright, in anticipation of better news flow from key projects such as MRT Line 2, RRIM Land and RAPID. We still expect cabinet approval and PDP appointment for MRT Line 2 to be announced by 1Q14. We understand there is more competition for the PDP role now, but based on track record and expertise alone, the MMC-Gamuda JV would be the most logical choice.

There has been more news on the long awaited RRIM development, which is positive for both contractors and developers. The 2,330 acre development is projected to generate RM50bn GDV over the next 20 years. We understand tenders for development of Phase I may start as early as Feb14, but we think 2Q14 is more realistic. Key beneficiaries would be contractors which have strong track record in building jobs such as IJM and Sunway, who also have top notch development arms to benefit from land tenders.

For MRT Line 1 (Sg. Buloh-Kajang), RM21bn worth of packages have been tendered out and awarded. According to the PDP for Line 1, progress of main civil works – elevated viaducts, stations and underground tunnels - are progressing well. As at end-November, cumulative completion was 33%. The target to get Phase 1 of Line 1 operational by end-2016 and the rest by July 2017 is on track.

The WCE project is making good headway with some tenders possibly in March/April 2014, and initial works could start by late 2Q14. IJM is still optimistic of clinching RM3bn worth of works from WCE which would more than double its current orderbook and also benefit its property, concession and piles manufacturing divisions. Also, we do not discount IJM taking a project manager role, but possibly sacrificing some margins for a larger portion of the contract.

Fitch Ratings has said that an extended and worsening political impasse would eventually impair Thailand’s economic performance relative to its peers, which could undermine its credit strength. The inconclusive polls on 2 Feb 14 failed to
ease the political tension. Even after the sell-off, it still seems risky to be weighted in a cyclical sector such as construction with the Bt2trn infrastructure bill in a limbo.

Top picks for the month

We are sticking to our top picks from Malaysia.
IJM (Share price: RM5.74, TP: RM7.20)
IJM remains our top pick for Malaysia. The overhang created by the sale of shares by Zelan is at its tail end. Coupled with some tenders for WCE by 2Q14, these should pave the way for a share price rerating. IJM also has a strong pipeline of
internal jobs such as Kuantan Port expansion and Light Phase 2. Meanwhile, the market is still assigning negligible value to its construction business.

Gamuda (Share price: RM4.45, TP: RM5.40)
The share price retracement YTD is a good opportunity to buy the stock. Even in the worst case scenario, that it does not clinch the PDP role for Line 2, it would be able to also bid for above-ground works. The revival of the southern doubletracking project will help to fill the potential vacuum in construction earnings in FY16.FY14 and FY15 will be peak years for MRT Line 1 for Gamuda, while Line 2 will only contribute in FY17.

by DBS Vickers