Construction stocks still show upside potential

KUALA LUMPUR: Construction stocks, which are trading on an average of 12.8 times 12-month forward earnings, below the FBM KLCI’s 16 times, still have upside potential, said analysts, who remain “overweight” on the sector in the light of a solid pipeline of projects.

Maybank Investment Bank (Maybank IB) Research said some positive events that have occurred since the beginning of this year have strengthened the pipeline of construction works in the near term as well as in the longer run.

They include major construction projects like the RM11 billion Project 3B power plant, the RM1 billion Langat 2 water treatment plant and the go-ahead for the refinery and petrochemical integrated development (Rapid) and the Klang Valley mass rapid transit line 2 (KVMRT 2).

“The solid pipeline of projects should propel strong replenishment in construction order book, going forward. This should in turn sustain and even support the construction earnings growth momentum,” Maybank IB Research said in a report on Wednesday.

It said all eyes are now on the actual job awards from key projects, including Rapid and the West Coast Expressway.

Maybank IB Research said the total of new construction projects awarded last year were well sustained at RM92.3 billion against RM123.6 billion in 2012, which included the KVMRT 1 project worth RM20 billion. The robust projects in the past few years have driven total construction works completed in 2013 to hit a six-year high of RM90.9 billion.

“Despite the bullishness, stock valuations are still lagging behind the FBM KLCI valuation and below the peak valuations during the previous bull cycle. Hence, we continue to overweight the sector,” said Maybank IB Research, adding that shares in Gamuda Bhd, IJM Corp Bhd, WCT Bhd and Hock Seng Lee Bhd (HSL) were trading at close to their mean forward price earnings ratio (PER) valuations despite their robust fundamentals, but “still below their respective peak valuations during the previous bull cycles.

In a March 18 note, RHB Research Institute Sdn Bhd said the prospects of the construction sector remain strong as it rides on an extended upcycle backed largely by the RM73 billion KVMRT project.

“With the RM23 billion line 1 currently under construction, and lines 2 and 3 worth RM25 billion each under planning, this mammoth mega project will keep the players busy until 2021,” it said.

The research house is advocating a two-pronged stock-picking strategy. Firstly, go for the high-beta highly liquid big-cap stocks like Gamuda, which will take the lead in reacting to new price catalysts such as the Cabinet’s approval for line 2, according to RHB Research Institute.

Secondly, look at small-cap stocks such as Protasco Bhd that is benefiting from other key areas of public infrastructure spending, particularly in public road maintenance and public housing and HSL, which is a good proxy to massive infrastructure spending in Sarawak backed by the Sarawak Corridor of Renewable Energy, urbanisation and rural development.

Shares in Gamuda closed up five sen or 1.1% at RM4.61 on Wednesday, ahead of Labour Day, while that of IJM rose two sen or 0.31% to end at RM6.38. WCT shares were unchanged at RM2.25, but HSL shares fell one sen or 0.52% to RM1.91.


This article first appeared in The Edge Financial Daily, on May 2, 2014.