The sector, represented by the Kuala Lumpur Construction Index, rose to 255.44 points in intra-day trade yesterday, its highest level in more than two years, since March 2008.
The KL Construction Index is a capitalisation-weighted index of all construction stocks in the Emas Index. Year-to-date, it has gained 13.88%, trailing the 14.5% gain in the FBM KLCI.
In a recent update, HwangDBS Vickers Research said the KL Construction Index had room to trade higher in anticipation of “more aggressive rollout of high-multiplier projects”. It added the index could test the high of 333.37 points hit in January 2008.
Many construction counters ended higher yesterday, with Gamuda Bhd closing 3.9% higher at RM3.70, IJM Corp Bhd at RM5.15 (up 1.2%), Malaysian Resources Corp Bhd (MRCB) at RM1.87 (up 2.2%), Sunway Holdings Bhd at RM1.73 (up 2.4%), and WCT Bhd at RM3 (up 3.1%).
Analysts said the market was somewhat optimistic on the outlook for the construction sector, not so much because of anticipation of new projects to be announced in Budget 2011, but more on the actual rollout of jobs. They expect more projects to be rolled out soon, which is crucial to create more economic activities before the next general election.
“For Budget 2011, we expect the formalisation and confirmation of major projects that were announced for the 10th Malaysia Plan (10MP) such as the LRT extensions, the mass rapid transit (MRT) project and perhaps the seven new highways,” said an analyst at a foreign brokerage firm. “In terms of new project rollouts, we don’t expect anything big; perhaps some infrastructural projects especially in Sarawak ahead of state elections which are expected to be called soon.”
In its note, HwangDBS said it expected the construction sector to “have more room to take off” once the RM36 billion MRT project was approved, which it considered likely given the recent subsidy cuts.
“The key inflection point could be the outcome of two independent engineering firms’ reports by this month. The (reported) MMC-Gamuda joint venture hopes to start work by early 2011 if it obtains approval by end-2010,” it said.
The brokerage firm picked Gamuda and MRCB as the two largest beneficiaries of the MRT project, with MMC Corp Bhd as an alternative MRT proxy. It also had a buy call on IJM as the safest proxy to the sector due to its diversified earnings base and strategy, while it viewed WCT as the proxy most leveraged to the sector.
“Our small-cap value pick is Sunway, which is trading at only 10 times CY2011 earnings per share (EPS) and will post record FY10 earnings,” it said.
Meanwhile, OSK Research recently upgraded its call on Gamuda to a trading buy with a target price of RM4. The research house had said it saw strong incentives for the implementation of the MRT project, in addition to the fact that it was highlighted in the 10MP.
However, ECM Libra Investment Research in a note yesterday maintained its neutral call on the sector following “patchy new job flows”.
It said the valuation of construction stocks was no longer compelling given that the expected award of mega projects in the coming months had been largely factored into existing earnings models.
Among the notable contracts awarded last week were the RM828.3 million infrastructure project for the Hulu Terengganu hydroelectric project to Loh & Loh Corp Bhd from Tenaga Nasional Bhd and the RM56 million contract for eight units of rail-mounted gantry cranes to Muhibbah Engineering Bhd from Penang Port Sdn Bhd.
Meanwhile, AmResearch, which is overweight on the sector, highlighted three major projects which have seen delays and uncertainties — the US$770 million Sabah Oil & Gas Terminal (SOGT), the RM2 billion new Low-Cost Carrier Terminal (LCCT), and the Langat 2 Water Supply Scheme.
AmResearch said Naim was expected to be one of the leading bidders for the SOGT job, re-igniting interest in Naim as a proxy play on the Sawarak Corridor of Renewable Energy (SCORE). The SOGT job was originally planned in 2007 and retendered due to a technical revision by Petronas Carigali Sdn Bhd.
With regard to the LCCT project, AmResearch said there were two remaining packages for the runway and taxiway/parking apron, with Gamuda and WCT being the frontrunners. Thus far, up to 40 packages worth around RM2 billion have been identified and awarded.
The lack of clarity surrounding the Langat 2 project and its timeline because of pricing and control over water distribution rights in Selangor remain major hurdles, it said, adding frontrunners for the project were Gamuda and Loh & Loh, while JAKS Resources Bhd could be a leading candidate for pipeline works.
Some of the risks pertaining to the construction sector as highlighted by HwangDBS include the timing of contract awards, the disputes between the state and federal governments pertaining to Langat 2 and the Bakun hydroelectric dam project, and the fragmentation of contract awards into small parcels.
The research house also cited rising raw material costs and potential competition from overseas contractors, particularly from China, as other risks that could threaten local players in the sector.
Written by Melody Song
This article appeared in The Edge Financial Daily, September 14 2010.
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