Construction sector
Maintain positive: We gathered that the growth in total value of contracts awarded to listed construction companies has shown significant increase to an estimated RM5.8 billion (more than 300% year-on-year [y-o-y]) in the first quarter of calendar year 2015 (1QCY15). This was considerably higher than the RM1.4 billion worth of jobs given out in 1QCY14. The expansion was largely backed by improvement in local and foreign construction jobs rolled-out during the period. The locally listed contractors were awarded RM3.9 billion and RM1.95 billion worth of new local and foreign jobs respectively. Among major projects that contributed to the growth were the RM1.2 billion phase 1 of new deep-water terminal at Kuantan Port, RM1.2 billion infrastructure works in Doha, Qatar, and RM539 million Puteri Cove Residences project.

Most of the contract awards in 1QCY15 were dominated by IJM Corp Bhd with RM1.7 billion of new jobs, followed by WCT Holdings Bhd and Eversendai Corp Bhd with effective values of RM850 million and RM860 million respectively. We are positive on the strong contract inflows by these three companies thus far as there was zero contract award in the corresponding period last year. Apart from them, the award of construction contracts to Bina Puri Holdings Bhd and Kimlun Corp Bhd was also picking pace to RM420 million and RM294 million respectively. We expect new job awards to continue to accelerate in the months ahead underpinned by government spending on infrastructure.

Going forward, while we expect the infrastructure segment of the industry to be propped up by the various upcoming transport-related projects, the property segment may remain subdued due to the weakening property market and implementation of goods and services tax recently. We observed that the amount of both residential and non-residential property jobs awarded to all construction companies has dropped by about -55% y-o-y from 4QCY13 to 4QCY14.

With the noticeable upsurge in contract awards in 1QCY15, we believe the momentum will persist with some large-scale projects award taking off this year. Moreover, some of these projects are deemed priority by the government and are contained in Budget 2015. Year-to-date, the government has stamped its commitment by giving the nod to the construction of RM1.6 billion East Klang Valley Expressway and the recent groundbreaking for the RM13 billion phase 1 of the Pan Borneo Highway.

As we enter the final year of the 10th Malaysian Plan, we expect the government to continue to push for infrastructure developments under the nation’s 11th Master Plan (11MP). We believe so as it will be the final five years before the 2020 deadline for Malaysia to achieve developed country status as targeted under the Economic Transformation Programme (ETP). The multiplier effect from physical infrastructure projects will continue to be the catalyst to the other sectors as well

Valuation-wise, the KL Construction (KLCON) Index is still trading at a discount to its historical five-year rolling fourth quarter price-earnings ratio (PER) of 17 times. As at early this week, the KLCON Index’s forward PER was at an estimated 12 times hence we expect a limited valuation downside on construction stocks. Therefore, we believe buying interests in construction stocks should emerge sooner rather than later as this is a good time to accumulate them before the award of contracts for upcoming mega projects.

Premised on above, we maintain our “positive” stance on the construction sector. We believe that timely awards of contracts is crucial to help sustain the sector growth. Our overall top pick is IJM Corp (target price [TP]: RM7.50) while Protasco Bhd (TP: RM2.45) is a favourite in the small- to mid-cap category. Meanwhile, we like Hock Seng Lee Bhd (TP: RM2.06) as a favourite to benefit from the Sarawak Corridor of Renewable Energy and infrastructure developments in Sarawak. We reckon these companies are in good stead to outperform the broader market and possess good earnings growth potential, inherent earnings quality, and/or attractive valuation. Although we deem Gamuda Bhd as a strong proxy to most local rail-related projects, we believe its current share has yet to react to the earnings transition phase in financial year 2016. Accordingly, we have a “neutral”recommendation on Gamuda with a TP of RM4.83.— MIDF Research, April 3

This article first appeared in The Edge Financial Daily, on April 6, 2015.