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.