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WITH over RM144 billion worth of mega transport and infrastructure projects in the pipeline, construction activity in Malaysia should gain momentum and boost the share performance of related companies this year.

A number of annual investment strategy reports released by local research houses and investment banks in December show that construction counters are among their favourite picks for 2015.

Most of them also have an “overweight” rating on the sector as its prospects remain bright, buoyed by multi-billion-ringgit public infrastructure and government-backed mixed-use developments.

Among the preferred stocks are Gamuda Bhd, IJM Corp Bhd, Mitrajaya Holdings Bhd and Muhibbah Engineering (M) Bhd.

Etiqa Insurance & Takaful head of research Chris Eng Poh Yoon tells The Edge that despite the risk that lower oil prices may dampen the development expenditure of the government, he is positive about the outlook for the construction sector. “Certain key projects, such as MRT 2 and the West Coast Expressway (WCE) will be kicking off in Peninsular Malaysia while the Pan Borneo Highway is also underway. Discussions on the high-speed railway will also keep the newsflow going in the sector.”

Eng continues to like Gamuda and Mitrajaya with the latter as his top small-market-capitalisation construction buy.

Kenanga Research analyst Iqbal Zainal tells The Edge that the job prospects for construction companies remain robust in 2015 but warns that those with exposure to the property sector could face earnings risks. “We prefer construction companies with a strong order book and sustainable margins. The likes of Gamuda, IJM Corp and Mitrajaya won’t fail you in terms of earnings performance, which is why the top picks are quite similar [among the research houses].”

Prime Minister Datuk Seri Najib Razak announced several major infrastructure projects in Budget 2015 that will boost the country’s economic growth and competitiveness. They include four expressways, the expansion of MRT and LRT as well as the RM69 billion Pengerang integrated petroleum complex.

The new roads are the RM5.3 billion Sungai Besi-Ulu Klang Expressway, the RM5 billion WCE from Taiping to Banting, the RM4.2 billion Damansara-Shah Alam Highway and the RM1.6 billion Eastern Klang Valley Expressway.

The MRT 2 line from Selayang to Putrajaya will be constructed at RM23 billion and the LRT 3 line from Bandar Utama to Shah Alam and Klang at RM9 billion while the east coast railway line will be upgraded at RM150 million.

In Sabah and Sarawak, the government plans to build the 1,663km Pan Borneo Highway at RM27 billion.

Affin Hwang Capital highlights the large number of Economic Transformation Programme (ETP) projects to be rolled out and likely additional excitement from the launch of the 11th Malaysia Plan (11MP). “Backed by bulging order books, the civil engineering and construction earnings of key contractors are expected to remain strong, at least in the next two to three years.

“We advise investors to continue to focus on contractors with good order book visibility and execution track record, and strong balance sheet, which help companies win large projects and enable them to withstand any unexpected slowdown in the sector or the economy.”

The research house’s high-conviction “buy” stocks for this year include IJM Corp, the construction order book of which will be boosted significantly by the WCE and the RM3 billion Kuantan Port new deep-water terminal project.

Alliance DBS Research says its recommendation for the construction sector remains an “overweight” due to continued government spending on infrastructure and ETP projects.

The government is anticipating construction’s gross domestic product to grow 12.7% in 2014 and 10.7% in 2015, and has earmarked RM50.5 billion for development expenditure compared with RM46.5 billion a year earlier.

“Our strategy is to focus on stocks that are associated with key flagship projects. We like Gamuda for its continuity with MRT 2. It has been appointed project delivery partner (PDP) for MRT 2 and we think it has a strong chance to capitalise on the tunnelling portion worth RM10 billion,” says Alliance.

The smaller to mid-cap pick is Muhibbah Engineering, which, in the research house’s view, has been unfairly sold down. “We expect the company to clinch sizeable contracts from the Pengerang and refinery and petrochemical integrated development project in the first quarter of 2015, boosting its RM875 million infrastructure order book.”

Hong Leong Investment Bank Research also names Gamuda as its top pick in the construction sector as it sees the company as a good proxy for MRT play with some catalysts, such as the rollout of the MRT Sungai Buloh-Serdang-Putrajaya line and resolution of the Selangor water saga.

Its small-cap pick is Mitrajaya as the company is backed by a sizeable construction order book, which implies a strong cover of seven times construction revenue in the financial year ended Dec 31, 2013.

Kenanga Research notes that the near-medium-term outlook for MMC Corp Bhd is bright as the initial public offering of Malakoff Corp Bhd is expected to take place in the second quarter of 2015 while the group could be a laggard after being appointed PDP for MRT 2.

The research house also favours Hock Seng Lee as the group is one of the biggest beneficiaries of the continued infrastructure spending in Sarawak.

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This article first appeared in The Edge Malaysia Weekly, on January 5 - 11, 2015.

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