Earnings well buffered, second half to be robust

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Construction sector

Maintain overweight: We retain our “overweight” on the sector as:

(i) we expect job awards to pick up post-13th general election (GE13) with the Klang Valley Mass Rapid Transit 2-3 (KV MRT2-3) tenders to provide the excitement in the second half,

(ii) construction groups on our “buy” list have strong outstanding order books to sustain their earnings growth in financial year 2013 (FY13); and

(iii) their valuations are undemanding at 7.7 times to 12.6 times 12-month (12M) forward earnings. The main risk will be the GE13, which may lead to job awards being deferred much longer than expected. Our top picks in the sector are WCT Bhd and Gamuda Bhd.

About RM70 billion worth of new jobs were awarded in 9M12 (-4% year-on-year [y-o-y]), according to the Construction Industry Development Board. Of this, RM11 billion (16%) were government jobs and the balance RM59 billion (84%) comprised private projects.

The value of government jobs in 9M12 had, in fact, fallen 41% y-o-y, while the construction sector’s job momentum had been held up by the tepid growth of private projects (+2% y-o-y). Significant progress was made at the KV MRT1, with RM19.8 billion worth of contracts awarded in 2012.

The major disappointment in 2012 was that a number of big-ticket projects failed to take off. These included the Gemas-Johor Baru double track rail, the Tun Razak Exchange and Kwasa land development in Sungai Buloh.

We expect the award of these projects to pick up pace after the GE13. The finalisation of the West Coast Expressway (WCE) concession last week was, however, a pleasant surprise which will add at least RM4 billion in jobs this year. Another significant project in 2013 will be the KV MRT2-3; the Cabinet’s go-ahead for this undertaking is expected in the second quarter of 2013 (2Q13), and tenders should start in late 3Q or early 4Q13.

Order book replenishment vis-a-vis job burn rate has been in the net positive territory for the construction groups under our coverage, with outstanding jobs in September 2012 higher than or similar to those in September 2011. The property development arms of Gamuda and WCT also registered record sales in 2012.

These positives will be the basis for earnings growth in FY13. Meanwhile, IJM’s order book growth will spike with about RM4 billion worth of potential jobs from the WCE concession, which would more than double its outstanding order book of RM3.3 billion as at September 2012.

The KL Construction Index underperformed the KLCI for a second straight year in 2012. Valuations wise, Gamuda and WCT now trade at 12.6 times and 11.5 times 12M forward earnings respectively, below the KLCI’s 14.3 times — levels which are at or below their historical means. IJM trades at 13.9 times 12M forward earnings.

Our top picks in the sector are WCT followed by Gamuda. — Maybank IB Research, Jan 10

 

This article first appeared in The Edge Financial Daily, on Jan 11, 2013.

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