This article first appeared in The Edge Financial Daily, on March 17, 2016.

Construction sector
Reiterate positive. Following the award from Pan Borneo Highway Sarawak (PBHS), we expect further awards from other key infrastructure to boost the positive sentiment in the construction sector. Major awards from the Klang Valley mass rapid transit Line 2 (KVMRT 2) are expected in March and April, two to three months ahead of the timeline. Its total value could exceed the initial estimate of RM28 billion, which would be a positive surprise to construction players via higher-than-expected job wins. We reiterate “positive” on the construction sector with Gamuda as the top buy and SCG the top mid-cap pick.      

A slew of tenders for the PBHS, KVMRT 2, Klang Valley light rail transit Line 3 and the other major highways (Dash, Suke, WCE, Central Spine Road) are ongoing and expected to be awarded in 2016. Following the recent PBHS award of some work packages, the KVMRT 2 could be the next key project to start rolling out major jobs earlier than expected. 

The total cost of the KVMRT 2 could be higher at RM30 billion to RM33 billion than the initial estimate of RM28 billion. 

The RM28 billion accounted for a longer underground tunnel, and more underground stations compared with KVMRT 1. Also, it imputed a 10% increase in overall cost per kilometre. Recent estimates are for the total cost to exceed the initial RM28 billion as bidders are mandated to budget for safety costs and impute higher imported material and equipment costs due to the weakened ringgit. The impending foreign worker levy hike would increase manpower cost.  

Upside to job win forecasts MMC-Gamuda would be the biggest beneficiary as the potential winner of the KVMRT 2 underground works, given that the value could be significantly higher versus RM8 billion under the KVMRT 1. As for the elevated packages, the existing KVMRT 1 players are in a stronger position to win KVMRT 2 jobs. Job win values could exceed expectations too if they clinch the more challenging packages. — Maybank IB Research, March 16