Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on October 12 - 18, 2015.

 

Construction_Infrastructure_Table_12_TEM1079_theedgemarketsDESPITE a huge pipeline of projects, construction stocks proved to be no less resilient than the broader market, which has been dampened by the worldwide selldown amid concern over the prospects of the global economy.

The KL Construction Index closely tracked the FBM KLCI Index over the past one year to close at 275.9 points last week, down 5.92% year on year. In contrast the benchmark index has lost 5.66% y-o-y to close at 1,706.54 points last Friday.

But the construction sector is unlikely to see a sharp slowdown in jobs simply because of expectations that the government would have to continue infrastructure building in order to sustain economic growth. Indeed, there is an an estimated RM240 billion worth of projects in the pipeline. (see Table 1)

The government’s pump priming efforts to lift the domestic economy out of the 1997/98 financial crisis put in place the foundations for some of the biggest blue-chips in the stock market. But some quarters have their reservations about the government’s ability to spend.

“Rumours are for an increase in development expenditure, although I struggle to see where that will come from. There could be more goodies for Sarawak ahead of the upcoming state elections and the usual Sarawakian construction counters will benefit,” says Chris Eng, head of research at Etiqa Insurance & Takaful.

Major projects in the pipeline for Sarawak include the RM27 billion Pan-Borneo Highway as well as smaller projects like transmission lines and sewerage treatment plants. The Pan-Borneo Highway will have a lot of political hurdles to clear if it is to be executed, but it is one of the most lucrative since it would be fully funded by the government.

Expected beneficiaries of the project include UEM Group Bhd, which is said to be taking a leading role in the project. And word in the industry is that Tan Sri Syed Mokhtar AlBukhary’s MMC Corp Bhd (fundamental: 1.10; valuation: 2.40) might no longer be involved.

Sarawakian counters expected to be involved in the project include Cahya Mata Sarawak Bhd (CMS) (fundamental: 2.70; valuation: 0.50), Hock Seng Lee Bhd (fundamental: 2.40; valuation: 1.20), Shin Yang Shipping Corp Bhd (fundamental: 0.20; valuation 0.90) and Naim Holdings Bhd (fundamental: 1.20; valuation 1.80).

Another major project that everyone in the industry is eyeing is the KL-Singapore High-Speed Rail (HSR). While there has been some doubt about whether the HSR would get moving anytime soon, the Land Public Transport Commission (SPAD) and Singapore’s Land Transport Authority (LTA) last week issued a request for information (RFI) for the project.

“The RFI caught many players in the industry by surprise. SPAD and LTA did not give any indication that they would issue an RFI so soon. The RFI is just a way for them [SPAD and LTA] to gauge industry interest in the project. Realistically, contracts won’t be awarded till 2017,” says one industry executive who plans to bid for the project.

Given the sheer scale of the project, however, the civil works are likely to be broken into many smaller packages and many construction counters could get a slice of the action.

Interestingly, the RFI submissions can be sent separately to both SPAD and LTA, says the industry executive. “At this stage, why can’t the RFIs be sent to a single project management company jointly controlled by LTA and SPAD? Do they still have some issues to sort out, or was the RFI rushed? Either way, it doesn’t inspire confidence that the project will get moving anytime soon,” the executive says.

More importantly, funding was specifically mentioned as one of the criteria that SPAD and LTA are looking for in the RFI, along with HSR design, construction, operations and maintenance. This has given rise to speculation that the RFI was also a way for SPAD and LTA to gauge private sector confidence in investing in the project.

On that note, a lack of funding could be the main challenge going forward.

There have been concerns surrounding Petroliam Nasional Bhd’s (Petronas) US$16 billion Refinery and Petrochemical Integrated Development (Rapid) in Pengerang, since the sharp fall of crude oil prices.

While the project is unlikely to be scrapped, industry observers are expecting that Rapid will be rolled out at a slower pace and possibly on a smaller scale as well.

That said, Petronas has still been awarding contracts for RAPID. The most recent was the RM489 million contract awarded to Mudajaya Group Bhd (fundamental: 0.35; valuation: 0.90) to construct a workers village and temporary construction facilities for the utilities, interconnecting and off-site facilities.

It is notable that the contracts will also flow down to subcontractors. For example, Muhibbah Engineering (M) Bhd (fundamental: 1.10; valuation 0.80) earlier this year secured a RM158.2 million job from Toyo Thai Malaysia Sdn Bhd for works related to the steam cracker complex.

“As long as there are no major cuts in the development budget it should be good for the sector. The Rapid project has been coming along, contrary to earlier expectations that works would be slow. At the same time, Putrajaya jobs are still carrying on,” says Eng who is “overweight” on the sector.

One project that seems to have hit a funding speed bump is the KL118 development under Permodalan Nasional Bhd (PNB). UEM Group, together with South Korea’s Samsung, are reported to be front runners for the project and industry sources say PNB recently put the project on hold for 90 days, although the groundworks for the skyscraper are already underway.

On the bright side, both the third light rapid transit (LRT) line and the second mass rapid transit (MRT) line are not expected to be delayed. Malaysian Resources Corp Bhd (MRCB) (fundamental: 1.30; valuation: 2) and George Kent (M) Bhd (fundamental: 2.10; valuation: 0.80) were recently appointed project delivery partners (PDP) for the LRT line 3.

Meanwhile, it is understood that packages for MRT line 2 will begin tendering in the next few weeks. The PDP for MRT line 2 is Gamuda Bhd (fundamental: 1.30; valuation: 1.40) and MMC Corp.

As for the highways, only the Kidex highway seems to be stalled indefinitely, whereas long-delayed projects like the Damansara-Shah Alam Elevated Expressway (DASH) and the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) finally seem to be gaining traction with the pre-qualifying process under way.

IJM Corp Bhd (fundamental: 1.30; valuation: 1.80), Sunway Construction Group Bhd (fundamental: NA; valuation: NA), MRCB, Mudajaya and UEM Group have been shortlisted in the pre-qualifiers for DASH and SUKE.

Other highways that are expected to kick off in the near term are the Maju Expressway (MEX) extension and the Damansara Ulu Kelang Expressway (DUKE) extension, DUKE 3. After getting approval from the Economic Council over one year ago, the MEX extension is now pending the approval of UKAS — the Public Private Partnership Unit.

Meanwhile Ekovest Bhd’s (fundamental: 1.15; valuation: 1.40) DUKE 3, is also in the process of finalising the alignment of the highway with UKAS.

But how much of these projects are already priced into construction stocks?

Since the start of the year, some construction stocks have taken a beating in line with the selldown on the broader market. The big-cap construction stocks, in particular, haven’t performed very well. Part of the reason was due to some of their exposure to the property development sector.

Affin Hwang Asset Management Bhd head of Equity Strategies and Advisory Gan Eng Peng is less convinced about the sector’s prospects going forward.

“There will be more money for infrastructure projects, but it is not expected to be very big. The fiscal deficit is very close to the limit and with contingent liabilities, it is well over the limit. I don’t see how the budget will be a magic bullet for the sector,” says Gan.

“The major construction companies are already very big and they have lots of huge projects under their belt. Take Gamuda, for example. A new RM1 billion project would only add 5 sen to 10 sen to its value. It would take very big contracts to get people excited about these stocks and I don’t see that happening. Perhaps with the high-speed rail, but that is a few years off,” says Gan, who is more focused on the big-cap construction stocks.

“Let’s say they [construction companies] are very big but cheap, that would be worth looking at. But they are very big and they are not cheap,” he adds.

Gamuda, for example, saw its share price fall on foreign sell-offs back in August, despite announcing that it had been selected as the PDP for Penang’s Transport Master Plan worth RM27 billion.

By the same token, Eng, who is “overweight” on the sector, names IJM Corp, Mitrajaya Holdings Bhd (fundamental: 1.50; valuation: 2) and Protasco Bhd (fundamental: 0.75; valuation: 1.20) as his top picks.

Other stocks that might be worth watching include the purer construction plays like Kimlun Corp Bhd (fundamental: 1.70; valuation: 2.60) or stocks with a political angle like CMS, which have seen strong trading interest.

Otherwise, stocks that look cheap (see Table 2) include Gadang Holdings Bhd (fundamental: 1.70; valuation: 3), which is trading at less than six times earnings. Gadang, which has been able to get jobs in the previous MRT line, could be a beneficiary of the second line.


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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