SINGAPORE (June 23): With the Asean-5 looking to improve their global competitiveness in the years ahead, HSCB Global Research is anticipating a regional shift in spending from power and telecoms, to the largely-neglected transport infrastructure segment.
In a June report entitled Asean Infrastructure – Full Throttle, industrials analyst Somesh Agarwal projects infrastructure investment in the Asean-5 to double over 2016-20E to US$705 billion (S$980 billion), representing 4% of its member countries’ total GDP, with 65% going into transport.
“After taking into account the various government initiatives, we think Thailand and Indonesia are at the forefront of the transport push, while Malaysia has mature infrastructure and is trying to improve regional connectivity by expanding the rail network,” notes Agarwal.
“We think the Philippines, despite the government’s ambitious plans, is lagging in execution. Singapore has high quality infrastructure and doesn’t require large investments,” he adds, underscoring his belief that local contractors will be the key beneficiaries of an increase in new orders from anticipated higher government spending on the segment.
As such, the analyst has highlighted six stocks to “buy” as direct plays on the theme of increased transport infrastructure spending.
Indonesian construction engineering company Wijaya Karya (WIKA) is HSBC’s first and foremost “buy” pick as one of the five state-owned enterprises (SOEs) in Indonesia, with profits expected to grow by 24% and 25% in 2017E and 2018E, respectively.
In Agarwal’s view, it also has a strong order book that provides three years of earnings visibility, strong order inflow prospects, and a robust net cash balance sheet.
Sino Thai E&C and CH Karnchang, both among the top four construction companies in Thailand, are seen by HSBC as direct beneficiaries of the increased government spending. Both companies have already won a significant number of government contracts over the past year, which leads Agarwal to believe they are well-positioned for further new order wins over 2017-18E.
In Malaysia, HSBC prefers infrastructure group Gamuda as the best proxy transport infrastructure spending.
“We believe its strong execution track record and winning the contract for MRT Line 1 and being appointed as the project delivery partner for the Penang Transport Master Plan (PTMP) makes it the frontrunner for winning other large projects over the next 2-3 years,” states the industrial analyst.
Meanwhile, as the Philippines’ “ambitious infrastructure drive faces hurdles”, Agarwal has identified Metro Pacific Investments (MPI) as a direct opportunity to participate in the country’s infrastructure push.
This is because the company derives earnings from toll roads, water distribution, power and hospitals – and also recently entered the rail segment while looking to participate in the government’s large rail projects in the next two years.
Lastly, although the analyst sees fewer opportunities for domestic companies in Singapore given the city state’s “robust infrastructure”, land transport company ComfortDelGro (CDG) has been picked as a likely beneficiary of the Singapore government’s rail transport expansion.
While HSBC’s “buy” rating on CDG has been maintained, its target price estimate is lowered to S$2.90 from S$3.12 previously as the research house has reduced its 2017-19E earnings estimates by 7-10% due to a reduction in margin estimates.
“While CDG operated only one MRT line (North East) until 2015, it won the tender for the Downtown Line, which started operating in phases in 2016. CD is also one of the two bidders invited by the LTA for the operation of the Thomson-East Coast Line, which commences in 2019. We think that operators are poised to benefit from the cost-plus model under the new rail model initiated by the government last year,” says Agarwal.
As at 10.22am, shares of CDG are trading 2.1% lower at S$2.35.