Execution Time; Earnings Well Buffered
Maintain Overweight. We retain our Overweight on  the sector as: 
(i) we expect job awards to pick up post the 13th general election (13GE)  with the  KV MRT2-3 tenders  to provide the  excitement in 2H13, 
(ii)  construction groups  on our BUY list have strong outstanding order  books to sustain their earnings growth in FY13, and 
(iii) their valuations are undemanding at 7.7-12.6x 12M forward earnings. 

The main risk will be the 13GE, which may lead to job awards being deferred much longer than expected. Our top picks in the sector are WCT and Gamuda. Key developments in 2012. MYR70b worth of new jobs were awarded  in 9M12 (-4% YoY), per the Construction Industry Development Board (CIDB). Of this, MYR11b (16%) were government jobs and the balance MYR59b (84%)  comprised  private projects. The value of government jobs in 9M12 had, in fact, fallen 41% YoY, while the  construction sector’s job creation momentum had been held up  by tepid growth of  private projects (+2% YoY). Significant progress was made at the Klang  Valley (KV) MRT1, with MYR19.8b worth of contracts awarded in 2012. 

2013 outlook:  Awaiting  takeoff.  The major  disappointment in 2012 was that a number of big-ticket projects failed to take off.  These include the Gemas-Johor Baru double track rail, Tun Razak Exchange and 
Kwasa (Sg Buloh) land development. We expect  the award of these projects to pick up  pace  after the 13GE.  The  finalisation of the West  Coast Expressway (WCE)  concession last week was  however  a 
pleasant surprise which will add at least MYR4b jobs this year. Another significant project in 2013 will be the  KV  MRT2-3; the Cabinet’s goahead  for this undertaking  is  expected in  2Q13, and  tenders  should 
start in late-3Q or early-4Q13. 2013 outlook: Stronger order books. Order book replenishment vis-avis job burn rate has been in net positive territory for the construction  groups under our coverage, with outstanding jobs  in Sep 2012 higher  than, or similar to those of Sep 2011. 

The property development arms of Gamuda and WCT have also registered record sales in 2012. These 
positives will  be the basis for earnings  growth in FY13.  Meanwhile, IJM’s order book growth will spike with c.MYR4b worth of potential jobs from the  WCE concession, which would more than double its 
outstanding order book of MYR3.3b as at Sep 2012.

Stock picks. The KL Construction Index underperformed the KLCI for a second straight year in 2012. Valuations-wise, Gamuda and WCT now trade at 12.6x and 11.5x 12M forward earnings respectively, below the KLCI’s 14.3x – levels which are at, or below, their historical means. IJM meanwhile trades at 13.9x 12M forward earnings. Our top picks in the sector are WCT followed by Gamuda. We like WCT’s shift in focus to more stable property investment  and  development  income relative to construction. We expect Gamuda to feature in the KV MRT2-3 project; it is eyeing a role in the project delivery partner (PDP) and tunnel works

WCT: Our top pick. Outstanding construction order book of MYR3.8b (46% overseas, in Qatar and Oman) and unbilled property sales of  MYR518m, both as at end-Sep 2012, should provide for another year  (FY12/13) of growth. In 2012, WCT clinched MYR1.9b new construction  jobs (2011: MYR187m) and sold a record  MYR700m new properties  (2011: MYR456m). 2013 will see the opening of the KLIA2 with  construction works of its integrated retail complex to complete in May.  This could draw more interest on the stock. The stock now trades at just 11.5x 12M forward earnings vis-à-vis Gamuda’s 12.6x and IJM’s 13.9x.

Gamuda: Our other top BUY. Outstanding construction order book of MYR4.5b (84% KV MRT1, 16% northern double track rail) and unbilled property sales of MYR1.2b, both as at end-Oct 2012, will underpin 
FY7/13 earnings growth. In FY7/12,  Gamuda secured  MYR4.1b new construction jobs  solely relating to the KV MRT1 tunnel works  (2011: nil) and sold MYR1.53b new properties (FY7/11: MYR1.32b). 2013 will see newsflow on the KV MRT2-3 and Gemas-Johor Baru double track rail which Gamuda is eyeing. The stock now trades at just 12.6x 12M forward earnings vis-à-vis mean of 15.8x.