No excitement in construction sector

Business & Markets 2013
Written by BIMB Securities Research   
Friday, 18 October 2013 10:02

Construction sector
Recommend neutral: As we enter into the final phase of the year, we noticed that there is a big difference in earnings between the big and small cap construction companies. In terms of earnings, the bigger caps have performed within expectations while the smaller ones have disappointed due to slow billings and variation orders as well as higher cost pressure.

As such, we have tweaked our earnings projections lower for Benalec Holdings Bhd, Kimlun Corp Bhd and Eversendai Corp Bhd in view of the fact that they may take a longer time frame to recover.

Based on our compilations, the total RM4.1 billion worth of contracts awarded in the third quarter of 2013 (3Q13) was 41.3% higher than in 2Q13 (RM2.9 billion), buoyed by a 46.8% quarter-on-quarter improvement in the award of  domestic projects.

The total value of contracts as at the first nine months of 2013 (9M13) is slated to be RM16.9 billion, which is 43.3% lower year-on-year compared to 9M12’s RM29.8 billion. The weaker number is mainly due to: (i) lack of large-scale projects — year-to-date (YTD), only two large projects were awarded, namely the engineering, procurement and construction of a tension leg platform for the TLP Malikai Deepwater Project (RM2.4 billion), and the complete package of works for the East Klang Valley Expressway (RM1.6 billion); (ii) high base effect as a large portion of the Klang Valley Mass Rapid Transit (KVMRT) Sungei Buloh-Kajang Line packages were awarded in 2012; and (iii) the run-up to the 13th general election in May (GE13).

Post GE13, the industry outlook now depends on the outcome of Budget 2014, which will be presented on Oct 25.

As the government is under pressure to reduce the budget deficit to 3.5% of GDP in 2014 and improve the national current account, we believe the construction sector may be affected, resulting in a potential delay in the implementation and execution of some new and ongoing projects.

We expect most of the big ticket projects to be subject to further review for costing purposes. These projects include the KL-Singapore High Speed Railway, East Coast Rail Link, Menara Warisan Merdeka, Petronas’ refinery and petrochemical integrated development in Pengerang, Tun Razak Exchange, and Bandar Malaysia. Nevertheless, projects with low import content and high multiplier effects have been given the green light to proceed.

Nonetheless, the industry has to be sustained by the continuity of the KVMRT Line 2 and 3 projects which are expected to use existing resources from the Line 1 package.

In the near term, we expect the industry to be boosted by positive news flow on (i) the federal and Selangor government’s water concession agreement which is related to the development of Langat 2 (RM1.2 billion); (ii) the West Coast Expressway project (RM6 billion) finally reaching the tender stage; and (iii) approval for KVMRT Line. The industry would also be supported by the implementation of the first phase of the affordable housing scheme (RM1.5 billion) and ongoing development projects such as Samalaju Port in Sarawak, the Sarawak Corridor of Renewable Energy and Iskandar Malaysia in Johor.

For the months ahead, we are “neutral” on the sector as we expect contract awards to be unaggressive. As for our construction universe, we maintain our 

“buy” calls on Gamuda Bhd (target price [TP]: RM5.48), 
WCT Holdings Bhd (TP: RM2.73), 
Benalec (TP: RM1.30) and 
Eversendai (TP: RM1.70) at this juncture, as we will review our calls pending results announcements next month. We are “neutral” on IJM Corp Bhd (TP: RM6.27) and Kimlun (TP: RM1.98). — BIMB Securities Research, Oct 17