Sarawak’s election stocks

If Malaysia’s 13th general election is held this year, as is widely expected, we could see two sets of elections held close to each other or even concurrently — the other being Sarawak’s state election.

Although the dates of the Sarawak state election, which are due this year, and the 13th general election have not been announced, speculation is rife that they will take place by the first half of the year.

Indeed, election plays are expected to be one of the main investment stories this year and analysts are already betting on which stocks will ride on the theme.

Many investors wonder if the bulls will charge in the land of the hornbills.

Based on past trends, Sarawak-based stocks perform better during an election rally compared with their Peninsular-based peers.

Maybank IB, for instance, notes that Cahya Mata Sarawak Bhd (CMSB) surged 34% in three months leading to the dissolution of the state assembly on April 28, 2006.

Naim Holdings Bhd gained some 13% while Ta Ann Holdings Bhd rose 18% during the same period. Zecon Bhd gained 10% while Encorp Bhd rose a staggering 67%.

Hock Seng Lee Bhd (HSL), meanwhile, climbed over two months to its 52-week high of 69.5 sen on March 17, 2006 — a significant increase from its 52-week low of 51.9 sen on Jan 25, 2006.

The next few months could see a repeat of 2006, when prices of Sarawak-stocks rose just before the state elections in May that year.

In fact, investors may already be buying into the state-election story, as there has been a run-up in the prices of a few Sarawak-based stocks recently.

The rally in Sarawak stocks is expected to continue in tandem with the news of an increasing number of contracts being awarded. OSK Research, for one, recently noted that between January and October last year, the number of jobs awarded to to listed contractors in Sarawak rose 43.9% year-on-year. The research house expects the momentum to persist.

The demand for Sarawak plays could also be due to the counters having undemanding valuations backed by strong financial fundamentals, even if one were to strip out the state-election factor.

Interestingly enough, most of the counters have been profitable over the last three years and most of them are in net cash positions and provide very high returns on equity (ROE).

HSL, for one, has been a net cash-company over the last two years and offers an impressive ROE of between 18% and 21%.

It is therefore not surprising that institutional shareholders, including the Employees Provident Fund (EPF) have been picking up HSL shares of late. From a 6.8% stake in HSL at the start of last year, the EPF now has an 11.03% stake.

Naim has also been profitable over the last three years, yielding a commendable ROE of above 13%.

CMSB, meanwhile, is considered by many to be at the forefront of Sarawak’s business landscape, backed by the power and wealth of Chief Minister Tan Sri Taib Mahmud’s family.

Based on CMSB’s 2009 annual report, Taib’s children and his late wife, Lejla Taib, owned around 42.9% of the company.

CMSB’s track record is testament to the company’s success rate when bidding for contracts.

According to filings with Bursa Malaysia, CMSB and its subsidiaries have won over RM1 billion worth of projects from the state and the federal governments since end-2004.

CMSB’s dominance in the production of cement and other building materials in the country’s largest state further emphasises its prominence as a construction firm there.

It is also worth noting that Datuk Abdul Hamed Sepawi, chairman and a shareholder of property developer and contractor Naim Holdings Bhd, is Taib’s cousin. Abdul Hamed also has a 19.9% stake in Sarawak Plantations Bhd.

It will be interesting to see the movement of CMSB, Naim and Sarawak Plantations shares over the next few months.

Abdul Hamed was also chairman of the now privatised Sarawak Energy Bhd and sits on the board of timber company Ta Ann, in which he owns a very small stake.

Ta Ann is one of the few Sarawak-based timber companies that diversified into palm plantations. The move has paid off as its 2009 financial figures show its palm oil business accounted for about 40% of Ta Ann’s net profit.

While the construction-based stocks stand out among the Sarawak counters, investors may also want to watch the oil and gas plays that may see some price movements following the recent awarding of a number of contracts.

The Sabah Oil and Gas Terminal (SOGT) project, which has been on hold for more than two years, is one major catalyst for Sarawak-based oil and gas stocks.

Analysts expect more contracts to be parcelled out after Petronas Carigali Sdn Bhd awarded SOGT jobs worth RM2.41 billion to Naim and Samsung Engineering Co Ltd last September.

Dayang Enterprise Holdings Bhd is a strong contender for Petroliam Nasional Bhd’s RM1.2 billion maintenance contracts and RM2 billion hook-up and commissioning (HUC) work expected to be awarded by the end of the year.

It is worth noting that Dayang, backed by a sizeable order book of RM1 billion, has an advantage over the other players in the area of HUC because it is one of the five short-listed for Petronas umbrella contracts or restricted tenders.

Another major catalyst for the Sarawak-based counters is the Sarawak Corridor of Renewable Energy (Score).

Although nothing has been officially said about Score jobs being exclusively for Sarawak contractors, they certainly have the competitive advantage being local players.

What is more notable is that, the large pie is expected to be shared among only a few, with the favourites being CMSB, Naim, HSL, KKB Engineering Bhd, Dayang and Leader Universal Bhd.

Some of the high-profile projects planned under Score include an aluminium smelter expected to cost between RM7billion andRM10 billion, Tatau pulp and paper factory (RM3 billion) and a zinc electro refinery (RM1.3 billion).

These mega-projects will only kick off within the next two to three years. Nonetheless, the initial phase of development, centring on basic infrastructure to support the feasibility of the projects, is already slowly trickling in.

Over the near term, Maybank IB said in a recent research note that construction awards should pick up with the recent closing of the tender of more than RM2 billion worth of road works.

It is a safe bet that more and the bigger jobs will flow in as the state elections draw closer. - by Isabelle Francis, theedgemalaysia.com